Can I Invest In Stocks At 16?

It’s never too soon to start learning about money – how to earn it, how to save it, and how to make it grow.

Unfortunately, financial literacy is rarely taught in school, so kids and their families have to find tools, resources, and educational materials on their own. After the basics – budgeting, banking, and building a savings account – the next step is investing. That’s the process of using the money you have to make more money.

Stocks make great investments for beginners. They are fairly easy to understand, and there are relatively low-risk opportunities that have a long history of generating returns over time. That sounds great for teens who want to build their own portfolios, but are they eligible to open brokerage accounts? Specifically, can a 16-year-old invest in stocks?

Can A 16-Year-Old Invest In Stocks?

In most states, teens can start driving when they reach 16, but there are a lot of other things that have to wait until the age of 18.

Opening an individual brokerage account to invest in stocks is one of those things. That’s because trading stocks and other types of assets requires a type of contract, and minors can’t sign contracts.

However, unlike other age-restricted activities such as voting and gambling, there are alternative solutions for teens of all ages who want to buy stocks.

Before exploring those options, make sure you are ready to invest. These are important points to consider:

• Do you have money that can be spared for the purpose of investing, or is every penny already critical to your budget?

• There are no guarantees when it comes to investing. Are you prepared to lose money if your stocks don’t perform as well as expected?

• Have you taken the time to learn how the stock market works? More importantly, do you have a clear strategy for choosing your investments?

If the answer to these questions is yes, it may be the right time to start investing in stocks.

Is It Illegal To Invest In Stocks At 16?

As mentioned, 16-year-olds can’t own their own brokerage accounts.

Brokerage firms won’t allow it, and they verify your identity before you make your first trade.

While there are legal ways for 16-year-olds to invest in stocks, fudging your date of birth to open a brokerage account is not one of them.

How Can A 16-Year-Old Invest In Stocks?

Minors can invest in stocks with the help of a trusted adult who is willing to open a custodial account or a joint account with a brokerage firm.

In a custodial arrangement, the adult is in charge of the brokerage account until the beneficiary reaches the required age to become the legal owner. In some states, the age is 18, but most states require you to be 21. In a few states, the age for beneficiaries to take ownership of these accounts is even higher at 25-years-old, and in Wyoming, the age can be as high as 30.

A custodial arrangement falls under the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA), so the accounts are referred to as UGMA and UTMA accounts. The biggest advantage is that once the beneficiary reaches the required age, ownership transfers without any snags.

The alternative is a joint account in which minors share ownership of the portfolio with an adult. This type of arrangement may give teens the opportunity to participate in trades more actively before they turn 18, but it’s important to remember that there is no automatic transfer of ownership. Joint means the funds belong to both people listed on the account until both agree to make a change.

Is Investing At 16 A Good Idea?

Assuming teens have the financial ability to invest and they have done the work of learning how to choose appropriate stocks, investing at 16 is a very good idea. Time is the most critical element of any successful investing strategy. That is to say, the longer funds have to grow in an investment account, the higher the final balance will be.

Consider this:

If 16-year-olds invest $100 per month until retirement, and they earn an average return of six percent, they will have a total balance of $461,763 if they retire at the age of 70. Only $64,800 is actual contributions – the remaining $396,863 is portfolio growth.

On the other hand, those who wait until they are 26-years-old to start investing will only have $248,730 by retirement age. Just $195,830 of that is portfolio growth.

What Is The Best Investment For A 16-Year-Old?

There’s a lot to think about when it comes to choosing the best investment for a 16-year-old. How much time and research has gone into evaluating options? Does it make sense to take risks, or would it be disastrous to lose a portion of the contributions?

For 16-year-olds who aren’t especially interested in studying the stock market and analyzing particular companies, the best investments are those that essentially take care of themselves.

For example, many exchange-traded funds (ETFs) have low expenses, and they move with the market. Historically, the market has always grown if given enough time, so despite periods of volatility, the risk of long-term losses is relatively low.

Some 16-year-olds are fascinated by the world of finance, and they want to learn all they can about individual companies. In those situations, individual stocks or funds with specialized goals can deliver better returns than ETFs that simply track the market.

Good Stocks To Buy For A 16-Year-Old

Teens who want to start investing but don’t want to worry about the risks associated with individual stocks can get involved in ETFs like these:

• Invesco S&P 500 Equal Weight ETF (RSP)

• iShares Core S&P 500 ETF (IVV)

• iShares S&P 500 Growth ETF (IVW)

• SPDR Portfolio S&P 500 ETF (SPLG)

• SPDR S&P 500 ETF (SPY)

• Vanguard S&P 500 ETF (VOO)

Those that prefer to buy individual stocks may want to begin with blue-chips that pay dividends. Blue-chip stocks have a long history of reliable performance, and the dividends they pay increase total returns.

Examples of blue-chip stocks that pay high dividends include:

• Apple (AAPL)

• Broadcom (AVGO)

• Mastercard (MA)

• NextEra Energy (NEE)

• Nike (NKE)

These might not be as exciting as stocks that make the news because of their dramatic overnight growth (remember GameStop?), but they will make it possible to begin building a portfolio that will last a lifetime.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.