You can start investing as early as you want.
As a child, you can make piggy banks to build a savings habit.
That piggy bank can then be used to buy their favorite toys or even invest somewhere to get profit out of it.
Children who have the habit to invest when they are young become more responsible and manage their financials better in life later.
Within a short time, you will be able to build a broad investment portfolio when you start early as a teenager investor.
Hence, in this article, I will tell you how you can invest in stocks as a minor.
So, let’s begin.
What are Stocks?
Stock is a form of security that represents ownership of a fraction of a corporation. So, if you own a stock, it means you own a part of the company. Companies sell stocks to raise money and that money is used to make new products, invest in growth, or to pay off debts. And in return company gives dividend (a share from the company’s profit) or you can sell the stock when the prices go up and earn profit out of it.
How a Minor can invest?
Being a minor (under 18) you can’t open your own brokerage account. But there is a way you can invest in stocks while you are under 18 and that is through Custodial Account.
How does Custodial Account work?
On behalf of a minor, a parent or guardian opens a custodial account. Parent or guardians will ‘gifts’ funds into it. And the maximum amount that can be gifted in a custodial account is $15,000. Once the amount is there, minor can begin investing the money. The trades and all the discussion with the account broker will be done by the guardian on behalf of the minor.
Once you turn 18 or 21 (whichever is the legal age in your state), the account’s ownership will revert on your name. And by that time you will have a good portfolio of investment to manage on your own.
Types of Custodial IRAs
· Custodial Traditional IRAs
IRAs, also known as Individual Retirement Account can also be opened on behalf of minor. The traditional IRAs give you compound interest. So, if you invest a certain amount in your traditional IRA, it lets your money accumulate and by the time you will get the complete ownership of the account, you will have your invested money plus the accumulated compound interest. The investment earnings in your IRA will accumulate on a tax-deferred basis.
· Custodial Roth IRAs
Another option is to set up a custodial Roth IRA as a teenager. The benefit of Roth IRA over a traditional IRA is that Roth contribution in not tax-deductible. The best thing about Roth IRA is that after five years, you can withdraw your contributions at any time and you will not be charged regular income tax or 10% early withdrawal penalty. The income tax and penalty will only be applied on the accumulated investment earnings.
How to Invest in Stocks as Minor?
If you would like to invest in stocks and you are under 18 years old then you will need a custodial account. The guardian on your behalf will connect to account broker and will purchase stocks. You are not eligible to be in direct contact with account brokers or make trades.
But before buying stocks, you need should research properly and don’t invest in some stock because some buddy asked you to do so. 4 M’s principle is great to follow and invest in stocks.
The Four Ms (Meaning, Moat, Management, Margin of Safety)
- Meaning: It is very important that you not only like the company you are investing but the business have some meaning to you. You should have an idea about the industry and business model of that company. Just because you spend hours and hours on Facebook, it does not mean you invest in it, unless you know its business model and how they make money etc.
- Moat: Also, know whether the business has the ability to maintain its competitive advantages over its competitors. In this way, company will have long-term profitability and hold its market share. What competitive advantage a company has; switching, price, brand, toll bridge, or secrets.
- Management: The management of a company tells a lot about how the company works and its organizational structure. Search about company’s CEO and how he is running the business. Is he good with his people? Does CSR work or not? All these matters a lot in running the company for long term.
- Margin of Safety: Most important aspect of investing in stocks is that there should be margin of safety. Make sure that you buy stocks on discount so that you have a large margin of safety. Even if the prices go down and you need to sell the stock, your loss will be less.
Once you look at all the above aspects, start investing in the stocks. As the saying goes, don’t put all eggs in one basket, same goes for investment. Don’t invest all your money in buying stock of one company, rather go for different companies from different industries. Even if there is economic issue and one sector gets affected, you will still be making money from other stocks of different industry. The earlier you start investing, the more the chances of being a successful investor in the long-term.
So, if you are looking on how to invest under 18 and want to open a custodial account, you can visit Loved. They offer commission-free investing for minors and you can start with just $5. Loved’s mission is to give the next generation the correct financial tools so that they succeed in their investments. Do check their custodial account and start investing early and wisely.