How to Buy Stocks When You Are Under 18 Years Old

Stocks represent ownership shares in a company, offering investors a claim on a portion of its assets and earnings. Companies issue stocks to raise capital for growth or new projects. Investing in stocks can be a beneficial long-term strategy, as historically, they have often outperformed other investments over extended periods. This approach allows for potential capital gains as the stock’s value increases and can provide income through dividends, which are portions of a company’s earnings paid to shareholders. Holding stocks for the long term can also allow for compounding, where earnings generate further earnings.

Understanding Custodial Investment Accounts

Minors are generally not permitted to own stocks or other investments directly due to legal restrictions. Custodial investment accounts provide a mechanism for adults to manage assets on behalf of a minor until they reach the age of majority. These accounts are established under either the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). Both UGMA and UTMA accounts involve an adult, the custodian, who manages the account for the minor beneficiary, making all investment decisions and overseeing the funds until the minor reaches a specified age, which varies by state but is typically between 18 and 21 years, or up to 25 in some cases for UTMA accounts.

A key distinction between UGMA and UTMA accounts lies in the types of assets they can hold. UGMA accounts are generally limited to financial assets such as cash, stocks, bonds, mutual funds, and insurance policies. UTMA accounts offer broader flexibility, allowing for a wider range of assets, including real estate, intellectual property, artwork, and other tangible properties, in addition to financial assets. Most states have adopted the UTMA, which often supersedes UGMA. Assets contributed to these accounts are considered irrevocable gifts to the minor.

The custodian has a fiduciary duty to manage the account in the minor’s best interest. All investment and spending decisions must solely benefit the child. The assets within the account legally belong to the minor from the moment they are deposited, even though the custodian controls them.

Setting Up a Custodial Investment Account

Establishing a custodial investment account requires gathering specific information and documentation from both the adult custodian and the minor beneficiary. This typically includes their full legal name, Social Security number or tax identification number, date of birth, and current address. The minor’s legal name, Social Security number, date of birth, and address will also be required. Some financial institutions may also ask for government-issued identification documents for both parties to verify identities.

Choosing a brokerage firm that offers custodial accounts is an important step. Considerations include the fee structure, the range of investment options available, and the usability of their online platform or services. Brokerages may have varying minimum initial deposit requirements or offer different types of investments, such as individual stocks, mutual funds, exchange-traded funds (ETFs), or bonds.

The application process for a custodial account is often completed online. Application forms require accurate completion of all informational fields, including specifying the type of custodial account (UGMA or UTMA) and indicating the initial deposit amount. After the account is opened, it can be funded through various methods, such as a one-time deposit, recurring transfers, or by transferring existing assets into the new custodial account.

Managing and Transferring Custodial Assets

Once a custodial account is established and funded, the custodian manages the investments. The custodian makes all investment decisions, places trades, and oversees the portfolio. This management must align with their fiduciary duty, ensuring all actions, including buying, selling, reinvesting dividends, or withdrawals, solely benefit the minor. Financial institutions typically do not allow highly speculative investments, such as margin trading or futures, within custodial accounts.

While the custodian maintains legal control, the minor can be actively involved in learning about investing and financial literacy. Custodians can use the account to teach the minor about market dynamics and investment principles. However, the minor cannot independently execute trades or access funds until reaching the age of majority.

Assets transfer to the beneficiary when the minor reaches the age of majority, which varies by state, commonly 18 or 21, but can extend up to 25 for some UTMA accounts. At this point, the custodian’s responsibilities conclude, and the adult beneficiary gains full legal control. The transfer process typically involves initiating a request, often requiring a new individual brokerage account in the adult’s name and documentation proving the beneficiary has reached the age of majority.

Tax Considerations for Custodial Accounts

Investment income generated within custodial accounts, such as dividends, interest, and capital gains, is generally taxable to the minor beneficiary. This income is often subject to the “kiddie tax” rules, which prevent shifting income-producing assets to children to exploit lower tax rates.

Under these rules, a portion of the minor’s unearned income is either tax-free or taxed at the child’s marginal tax rate. Income exceeding a certain threshold is taxed at the parent’s marginal tax rate. For example, in 2025, the first $1,350 of a child’s unearned income is typically tax-free, the next $1,350 is taxed at the child’s rate, and any amount above $2,700 is taxed at the parent’s rate. These thresholds are subject to annual adjustments by the IRS.

If a child’s unearned income surpasses the specified threshold and they are required to file a tax return, IRS Form 8615 must be completed and filed with the child’s Form 1040. The child’s Social Security number and a parent’s taxpayer identification number are required on this form. Parents may also elect to include the child’s interest and dividend income on their own tax return using Form 8814, provided certain conditions are met.