How to Legally Trade Stocks Under 18

While direct stock trading is not possible for individuals under 18, established legal methods allow minors to engage in the stock market. These pathways ensure compliance with legal requirements designed to protect young investors, enabling them to benefit from investment growth under adult supervision.

Legal Basis for Minor Investment

Individuals acquire the legal ability to enter binding agreements, known as contractual capacity, upon reaching the age of majority, typically 18. Prior to this age, minors have limited contractual capacity. Agreements they enter are often voidable, allowing the minor to cancel the contract to protect them from unfavorable obligations.

Laws restricting minors from entering contracts safeguard them from exploitation. Consequently, a minor cannot directly open a brokerage account or execute stock trades. Alternative structures are necessary for minors to hold investments.

Custodial Account Structure

A custodial account provides a legal framework for an adult to manage financial assets for a minor’s benefit. These accounts are established under state laws derived from either the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). The adult managing the account, known as the custodian, has control over the assets until the minor beneficiary reaches a specified age.

While both UGMA and UTMA accounts serve similar purposes, they differ in the types of assets they can hold. UGMA accounts are limited to 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 property.

All 50 states have adopted UGMA, making it universally available, while UTMA has been adopted by most states, with exceptions like Vermont and South Carolina. Assets placed into either account become the irrevocable property of the minor, meaning the custodian cannot reclaim the funds for personal use or for another beneficiary. The custodian’s management responsibilities continue until the minor reaches the age of majority, at which point the assets formally transfer to the now-adult beneficiary.

Opening a Custodial Account

Establishing a custodial account begins with selecting a brokerage firm that offers these specialized accounts. The custodian is responsible for initiating and completing the application.

To open the account, personal information is required from both the custodian and the minor beneficiary. The custodian provides their Social Security Number, address, and bank account details for funding. For the minor, their Social Security Number and date of birth are essential.

Application forms, whether online or paper-based, guide the custodian through the necessary fields. The custodian selects the type of custodial account (UGMA or UTMA) based on the intended assets and state regulations.

Operating a Custodial Account

Once a custodial account is established and funded, the designated custodian manages all investment activities on the minor’s behalf. This includes placing buy and sell orders for stocks, bonds, or other eligible investments. All investment decisions made by the custodian must be solely for the benefit of the minor.

Any income generated within the account, such as dividends or capital gains, is treated as the minor’s income for tax purposes. These earnings are subject to “kiddie tax” rules. For tax year 2025, the first $1,350 of a child’s unearned income is generally tax-free due to the standard deduction, and the next $1,350 is taxed at the child’s marginal tax rate, which is typically lower. Any unearned income exceeding $2,700 is taxed at the higher trust and estate rates, which can range from 10% to 37%.

There are no federal limits on the amount that can be contributed to a custodial account, though contributions are subject to annual gift tax exclusion rules. For 2025, an individual can contribute up to $19,000 per beneficiary without incurring a gift tax, while married couples can gift a combined $38,000. The custodian maintains control until the minor reaches the age of majority, which can vary by state and account type, typically between 18 and 25 years old. At this point, the assets in the account are legally transferred to the now-adult beneficiary, who gains full control.