How to Start Investing as a Teen

Investing early offers a significant advantage for teenagers, providing a unique opportunity to build wealth over an extended period. Beginning an investment journey in youth allows the power of compounding to work its magic, transforming modest contributions into substantial sums over decades. This early start also fosters financial literacy and discipline, equipping young individuals with valuable skills for their future financial independence. Understanding the fundamentals of investing now can set a strong foundation for long-term financial success.

Understanding Investment Basics

Investing involves allocating money with the expectation of generating a profit or return, unlike saving money in a bank account. Savings accounts primarily focus on preserving capital and typically offer lower returns, whereas investing seeks growth. A fundamental concept in investing is compound interest, where returns earned on an investment are reinvested, subsequently earning their own returns and accelerating wealth accumulation. This “interest on interest” effect is powerful, allowing small sums to grow considerably.

Every investment carries a degree of risk, the possibility of losing capital, balanced against potential reward. Generally, higher potential returns are associated with higher risks. Diversification is a strategy employed to manage this risk by spreading investments across various assets, reducing the impact of poor performance from any single investment. This approach helps to smooth out returns over time.

Common investment vehicles accessible to teenagers, often through a custodial account, include stocks, exchange-traded funds (ETFs), and mutual funds. A stock represents a small ownership stake in a company. ETFs are collections of various investments, such as stocks or bonds, traded on exchanges like individual stocks, offering diversification. Mutual funds are professionally managed portfolios of stocks, bonds, or other investments, where investors pool their money to buy shares in the fund.

For those seeking low-risk options, traditional savings accounts and Certificates of Deposit (CDs) remain available. Savings accounts offer liquidity and security. CDs typically lock in funds for a set period for a slightly higher, fixed interest rate. These options provide minimal growth but can be useful for short-term savings goals.

Choosing the Right Investment Account

When a teenager begins investing, the primary consideration is the legal requirement for a parent or guardian to open and manage the investment account on their behalf. This is because minors generally cannot enter into legally binding contracts, including those required to open brokerage accounts. The most common types of investment accounts legally available for minors are Custodial Brokerage Accounts, structured as Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts, and Custodial Roth IRAs. These accounts are established in the minor’s name but are controlled by a designated adult custodian until the minor reaches the age of majority, typically 18 or 21, depending on state law.

UGMA and UTMA accounts offer flexibility regarding the types of assets that can be held within them. Once the minor reaches the age of majority, they gain full control over the assets, and the custodian’s role ends. These accounts do not have contribution limits, but any unearned income generated above a certain threshold is subject to taxation.

A Custodial Roth IRA, while also requiring a custodian, offers significant tax advantages. Contributions to a Roth IRA are made with after-tax dollars, meaning that qualified withdrawals in retirement are entirely tax-free. The minor must have earned income to contribute to a Roth IRA, and contributions cannot exceed the lesser of the minor’s earned income for the year or the annual IRA contribution limit, which is $7,000 for 2024 and 2025. This account is designed for retirement savings.

When considering which account type is most suitable, parents and guardians should evaluate the teen’s financial goals and the intended use of the funds. If the goal is to save for future expenses like college or a car, a Custodial Roth IRA may be beneficial, provided the teen has earned income. If the objective is to gift assets or invest for general purposes without specific retirement goals, a UGMA/UTMA account offers greater flexibility in asset types and withdrawal timing. Before opening any account, the custodian will need to provide their Social Security number and identification, along with the teen’s Social Security number, to the brokerage firm.

Steps to Open and Fund an Account

After selecting the appropriate account type, choose a brokerage firm where the account will be held. When evaluating brokerage firms, consider factors such as low or no trading fees, a user-friendly online platform, and the availability of educational resources. Many reputable online brokerages offer custodial account options and robust tools.

Once a brokerage firm is selected, the application process begins online. The parent or guardian will initiate the application. During this phase, specific required documents and information will need to be provided. This generally includes the custodian’s government-issued identification and their Social Security number or Taxpayer Identification Number.

The Social Security number or Taxpayer Identification Number for the minor beneficiary will also be required. Some firms may request proof of address for both the custodian and the minor. Having these documents readily available can streamline the online application process. The firm will then review the application.

After the application is submitted and approved, funding the account is the final step. Brokerage firms offer several methods for initial and ongoing contributions. The most common method is linking an external bank account, which allows for electronic transfers. These transfers can take a few business days for funds to become available for investment.

Other funding options may include wire transfers, which are faster but can incur fees, or mobile check deposits. Some firms may also allow for direct rollovers from other eligible investment accounts. Establishing an automatic transfer schedule from a linked bank account can facilitate consistent contributions.

Basic Investment Strategies and Management

With an investment account established and funded, the focus shifts to how to invest the money. A foundational strategy for young investors is long-term investing, which involves holding investments for many years. This approach aims to capitalize on the market’s historical tendency to grow over time. Patience is paramount in this strategy, as short-term market movements can be unpredictable.

Regular contributions, often through a technique called dollar-cost averaging, can enhance long-term growth. Dollar-cost averaging involves investing a fixed amount of money at regular intervals. This strategy means buying more shares when prices are low and fewer shares when prices are high, which can lead to a lower average cost per share over time. Setting up automated transfers from a bank account to the investment account can simplify this process.

Diversification remains a strategy to mitigate risk, even within a long-term framework. Instead of concentrating investments in a single stock or industry, spreading investments across various asset classes and regions can protect against losses if one particular investment performs poorly. For beginners, investing in a broad market Exchange Traded Fund (ETF) or a diversified mutual fund can be an effective way to achieve diversification. These funds typically hold a wide array of underlying securities.

Continuous learning is an aspect of managing investments. Periodically reviewing the portfolio’s performance and understanding the underlying investments can be beneficial. Many brokerage platforms offer educational materials and research tools that can help deepen understanding. The goal is to build a financial foundation and allow investments to grow steadily, rather than attempting to time the market or engage in frequent trading.

Tax Considerations for Teen Investors

Investment earnings for minors can be subject to specific tax rules, governed by the “Kiddie Tax” to prevent parents from shifting investment income to their children to take advantage of lower tax rates. For 2024 and 2025, unearned income (such as dividends, interest, and capital gains) above a certain threshold is taxed at the parent’s marginal tax rate. The first $1,300 of a child’s unearned income is tax-free, the next $1,300 is taxed at the child’s tax rate, and unearned income above $2,600 is subject to the parent’s tax rate. These thresholds are adjusted annually for inflation.

Custodial Roth IRAs offer a tax advantage. Contributions to a Roth IRA are made with after-tax dollars, meaning that qualified withdrawals in retirement are entirely tax-free. This makes Roth IRAs appealing for long-term savings, as the growth within the account avoids future taxation. There are specific rules regarding what constitutes a qualified withdrawal, generally requiring the account to be open for at least five years and the individual to be age 59½ or older, or meeting other specific criteria like disability or first-time home purchase.

Tax rules can be intricate and may vary based on individual circumstances and the specific types of income generated. For example, capital gains from selling investments held for less than a year are taxed at ordinary income rates, while long-term capital gains are taxed at potentially lower rates. Due to the complexities involved, especially with larger investment amounts or varied income streams, consulting a qualified tax professional is advisable. They can provide personalized guidance and ensure compliance with tax regulations, helping to optimize the tax efficiency of a teen’s investment portfolio.

Citations

“IRA Contribution Limits.” IRS. Accessed August 29, 2025. [URL]
“Retirement Topics – IRA Contribution Limits.” IRS. Accessed August 29, 2025. [URL]
“Topic No. 553, Tax on a Child’s Investment Income (Kiddie Tax).” IRS. Accessed August 29, 2025. [URL]
“Kiddie Tax: What It Is, How It Works, How to Calculate.” Investopedia. Accessed August 29, 2025. [URL]