RgStudio / Getty Images
Our Commitment to Our Readers
The editorial team at GOBankingRates is committed to bringing you unbiased reviews and information. We use a data-driven methodology to rate financial products and services, and our reviews and ratings are not influenced by advertisers. Learn more about our editorial guidelines and product and service review methodology here.
20 years
Helping you live a richer life
trusted
Millions of readers
Starting to invest in your teens is a great way to build up your savings: if you invest around $100 a month starting at age 16, you could have over $1 million in your account by the time you’re 65, assuming you can earn a 9% annual return. But if you wait until age 40, you’ll have to save nine times as much to reach the same goal.
However, there are some caveats to teen investing. For example, there are certain types of accounts that you must open with an adult if you are under 18. Also, to be successful in your long-term plan, you need to commit to learning the basic principles and strategies of investing in stocks and other options. Saving $100 every month is good, but if you don’t understand how to invest, you may end up losing that money instead of building a seven-figure savings.
To avoid this and make your investing career as successful as possible, here are the most important things you should know as a teen investor.
Fundamental Investment Principles
According to the Financial Industry Regulatory Authority (FINRA), a non-profit regulatory agency that oversees the securities industry, here’s the basic information all new investors should know:
Stocks: Stocks, also known as equity, represent ownership in a company that issues shares. Bonds: Bonds, also known as debt securities, represent a loan to an issuer. In exchange for the risk of the loan, the issuer pays interest and a return on your initial investment after a certain period of time. Mutual funds and exchange-traded funds: Mutual funds and ETFs may contain dozens or even thousands of individual securities, such as stocks, bonds, and other investments, managed by professional investors. Mutual funds are bought and sold directly with the issuer, while ETFs trade on the public market, similar to stocks.
FINRA also outlines steps beginners should take to begin their investing careers.
1. Define your investment goals
Some investors invest solely for growth, while others need income. Often it makes sense to combine the two. However, younger investors are more likely to lean towards growth investing, as they don’t need income for living expenses and have had enough time to recover from a stock market sell-off.
2. Choose your investment horizon
Your investment goals should be divided into short-term, medium-term, and long-term. The longer your investment goal, such as retirement, the more aggressive your portfolio can be. For short-term goals, such as saving for a summer vacation, high-yield savings accounts, CDs, and other conservative investments may be better choices.
3. Be patient
In the world of investing, “get rich quick” schemes usually end in failure. The best way to succeed in the long term is to invest steadily and take advantage of compound interest, which adds interest on interest. For example, if you invest $1,000 and earn a 10% return, you’ll make a profit of $100, for a total balance of $1,100. But if you keep that money invested for another year at a 10% return, you’ll make a profit of $110. Compound interest certainly adds up over time, but it takes patience to reap it.
4. Crawl before you run
It’s usually best for teen investors to start slow and use mock portfolios to understand how the markets work.
5. Start saving for retirement
Once you’re employed, ask about your company’s retirement savings accounts. Tax-deferred retirement plans like a 401(k) are one of the best ways to grow your long-term savings. You might not encounter such plans when you’re 16, but it pays to understand how they work by the time you start working.
6. Keep educating yourself
Before you invest your money, you need to fully understand what you are buying, both in terms of expected gains and potential losses, and the fees and other costs you will have to pay to own it. Understanding basic concepts such as diversification, which can reduce risk across your portfolio, is essential.
Put your money to good use
thank you!
Investment Types
While teenagers shouldn’t put all their money into one stock, they are still young enough to weather the ups and downs that come with the stock market.
So for long-term savings, you should consider an allocation that is weighted toward stocks. While the stock market and individual stocks are volatile, the S&P 500 has never posted a 20-year losing streak. Teens probably have 40 to 50 years until retirement, so they can afford to take on this risk.
Exchange-traded funds are also a good option for teens. Most ETFs track a popular index like the S&P 500 or Nasdaq Composite, which is a great way to “own the market” with a single investment.
Risk Management Strategies for Teens
For teen investors, the best risk management strategy is to start slow and not put all your eggs in one basket. Owning a high-flying stock like Nvidia can be fun, but if the stock price crashes (which is very likely with a stock that’s making incredible gains), you could end up losing a lot of money.
How Teens Can Open an Investment Account
If you are under the age of 18, you cannot own a financial account on your own. However, there are two main ways you can open an account.
Use a Managed Account
Also known as a Uniform Gifts to Minors Act (UGMA) account, this account is opened in the name of an adult parent or guardian, but lists you as the beneficiary on the account.
Open a Youth Account
These accounts are offered by companies like Fidelity. Though an adult’s signature is required, the accounts allow kids ages 13 to 17 to save and invest with no account fees or minimums. The accounts come with a fee-free cashback debit card, global reimbursement for ATM fees, and access to a brokerage account for investing.
FAQ
How can a 16 year old invest? 16 year olds can invest with a parent or adult guardian. Some companies offer youth accounts for people under 18, while others require you to open a managed account instead. Is it legal for a 15 year old to invest? Yes, it is “legal” for a 15 year old to invest, but only if they partner with an adult. You can only legally own your own financial account once you reach the age of majority (18 years old). How should a beginner start investing? Beginners should start with a mock portfolio until they understand the basics of investing. From there, investing in stocks that you know and understand is a good first step. Can a 16 year old use Robinhood? Robinhood’s general rules state that you must be at least 18 years old to use the platform. However, the company states on its site that if you are between 13 and 17 years old, “you may only use the Site under the supervision of a legal guardian who agrees to abide by these Terms.” What stocks should a 16 year old invest in? One of the most important rules in investing is to be consistent. To keep teenagers interested in investing, it’s usually a good idea to have them invest in blue-chip companies that they’re familiar with and interact with on a daily basis, such as Apple, Microsoft, and Meta Platforms.
View source
Our in-house research team and on-the-ground financial experts work together to create content that is accurate, unbiased, and up-to-date. We fact-check all statistics, quotes, and facts using reliable primary sources to ensure the information we provide is accurate. For more information on GOBankingRates’ process and standards, please see our editorial policy.
