Do You Have to Be 18 to Invest in Stocks?

Many individuals are interested in financial markets and wealth building. With the growing accessibility of investment platforms, a common question is whether there is a minimum age to invest in stocks.

Understanding the legal framework and available avenues is an important step for anyone considering the stock market, including options for those who do not yet meet standard age requirements.

The Legal Age for Investing

In the United States, individuals must be at least 18 years old to directly open a brokerage account and trade stocks. This age requirement stems from the legal principle of “contractual capacity.” Under this principle, minors are not considered to have the legal capacity to enter into binding contracts, such as those required to open a brokerage account. Brokerage firms require clients to be of legal age to ensure agreements are legally enforceable.

This restriction prevents individuals under 18 from independently buying or selling securities. If a minor were to enter such a contract, it could be deemed voidable, allowing the minor to cancel the agreement without penalty. To avoid these legal complexities, financial institutions adhere strictly to age-of-majority laws. Therefore, a direct investment account in a minor’s name is not permitted.

Investing Options for Minors

While minors cannot open their own brokerage accounts, they can participate in the stock market indirectly. The primary mechanism involves establishing a custodial account. These accounts are opened and managed by an adult, the custodian, on behalf of the minor beneficiary. The investments held within the account are legally owned by the minor, though the custodian controls the account until the minor reaches the age of majority.

This arrangement bypasses the contractual capacity issue because the adult custodian enters into the legal agreement with the brokerage firm. The minor, as the beneficiary, gains exposure to investments without directly managing the funds.

Navigating Custodial Accounts

Custodial accounts have two primary types: the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) accounts. UGMA accounts hold financial assets such as cash, stocks, bonds, and mutual funds. UTMA accounts offer broader flexibility, allowing for a wider range of assets, including real estate, intellectual property, and other tangible assets. The specific type available and the assets they can hold depend on the laws of the state where the account is established.

In either type of custodial account, distinct roles are defined. The “custodian” is the adult, often a parent or grandparent, who opens and manages the account. This individual has a fiduciary duty, meaning they are legally obligated to manage the assets prudently and solely for the minor’s benefit. The “beneficiary” is the minor who legally owns the assets within the account. Contributions to these accounts are considered irrevocable gifts to the minor, meaning they cannot be taken back by the custodian or donor once made.

The custodian makes all investment decisions, including buying and selling securities, until the minor reaches the age of majority, which is 18 or 21, depending on the state. Anyone can contribute funds to the account, but the custodian maintains control.

Investment income generated within custodial accounts may be subject to the “kiddie tax.” This tax rule applies to unearned income, such as dividends, interest, and capital gains, received by a child.

For the 2024 tax year, the first $1,300 of a child’s unearned income is tax-free. The next $1,300 is taxed at the child’s own tax rate. However, any unearned income exceeding $2,600 is taxed at the parent’s marginal tax rate, which is higher than the child’s rate. This rule prevents parents from shifting income to children in lower tax brackets to reduce their overall tax burden.

Investing Once You Are an Adult

When a minor beneficiary of a custodial account reaches the age of majority, the assets are legally transferred directly to them. The specific age for this transfer, 18 or 21, depends on the state’s Uniform Gifts to Minors Act or Uniform Transfers to Minors Act provisions.

The former minor can then manage the investments, including selling assets, reinvesting funds, or transferring them to a new account. As an adult, they become eligible to open and manage their own investment accounts. This includes individual taxable brokerage accounts and tax-advantaged retirement accounts like Roth IRAs or traditional IRAs, provided they meet income requirements.