What is the best way for a teenager to start investing?
FinancePolice frames the information as educational and conditional guidance, not as financial advice. Use the checklists and examples here as starting points and verify platform rules and current tax thresholds with the official sources linked in the article.
how to start investing as a teenager: a straightforward overview
Learning how to start investing as a teenager can begin with a few clear steps: learn the basics, choose an appropriate account structure, and start small with diversified, low cost investments. U.S. investor education guidance encourages teaching investing basics early and using custodial or supervised accounts so assets are held until legal transfer with parental oversight, which helps families understand duties and timing U.S. Securities and Exchange Commission (Investor.gov).
A teenager can begin by learning basics, choosing a custodial or supervised account based on ownership needs, starting with low cost diversified funds, and keeping records for tax reporting. Parents should supervise accounts and verify platform terms and current tax thresholds.
Early instruction tends to raise financial knowledge and can increase some saving and investing behaviors, though long term wealth outcomes vary by program quality and follow up. These mixed long term effects mean teaching should focus on practical habits and review over time Systematic review: Financial Education for Adolescents and Young Adults.
In this guide you will find short explanations of the legal choices parents and teens typically use, a plain summary of tax basics that matter for minors, sensible first investment options, and a step by step checklist for opening and funding an account. The rest of the article expands those steps into usable actions and examples that parents and teens can adapt together.
Understanding custodial accounts and legal options for teen investors
Custodial accounts are a common legal route for minors to hold investments. Under these accounts a parent or other adult acts as the custodian and controls assets for the minor until transfer at the age of majority. FINRA explains that UGMA and UTMA accounts differ mainly in the types of assets they can hold and in some transfer mechanics, so families should compare rules when choosing between them FINRA, and Investopedia provides a concise definition of UGMA accounts Investopedia.
Some platforms offer teen-linked or supervised brokerage accounts that let a teen view and sometimes trade with parental oversight, but these differ from custodial ownership because the adult may not be the legal owner. The Consumer Financial Protection Bureau outlines how teen banking and investing options vary and why verifying platform terms and parental responsibilities matters before opening accounts Consumer Financial Protection Bureau (CFPB), and Fidelity also offers an overview of custodial-account options for parents and guardians Fidelity.
When weighing choices, consider ownership transfer rules, who signs tax forms, and any platform account minimums or fees. The custodian has fiduciary duties that influence how gifts and investments are managed until legal transfer, so reading platform custody terms carefully helps avoid surprises. T. Rowe Price also summarizes common custodial account mechanics that families can review T. Rowe Price.
Tax basics every family should know: the kiddie tax and reporting
A child’s unearned investment income can be taxed under the kiddie tax rules, which affect how investment earnings are reported and when tax may be due. The IRS summarizes the basic treatment and filing considerations families should review when a minor has investment income IRS.
Typical responsibilities include tracking unearned income, filing required returns when thresholds are met, and keeping records of gifts or earnings used to fund accounts. Because thresholds and reporting rules can change, families should check current IRS guidance and consider a tax professional for complex situations.
Choosing what to buy first: index funds, ETFs, and simple allocations
Many investment educators recommend starting with broad market index funds or ETFs because they are low cost and provide instant diversification, which can be appropriate for multi year horizons. Vanguard and other major educators present low cost diversified funds as a sensible default for many young investors who have years until key goals Vanguard (see our review of micro-investment apps).
Diversification spreads risk across many securities and helps avoid the single stock risk that can come from picking individual companies. Fees matter because they reduce returns over time, so low expense ratios and low trading costs are practical decision factors for teen investors.
Simple sample allocations can be illustrative, not prescriptive. For teens with a long time horizon and higher risk tolerance, a heavy equity tilt like 80 percent total stock market index funds and 20 percent bond or stable funds can be reasonable to study. For shorter multi year goals or lower risk tolerance, shifting to 60 percent stocks and 40 percent bonds can reduce volatility. Adjust allocations as goals and experience change.
Practical steps to open an account and start with small purchases
Start with clear goals and a small emergency cushion before investing. Decide whether a custodial UGMA or UTMA account or a supervised teen account fits your family, then gather necessary documents like identification for the custodian and the minor, and any proof of gifts or earned income you’ll use to fund the account U.S. Securities and Exchange Commission (Investor.gov).
A simple tracker to plan monthly contributions and first purchases
Use to keep small consistent steps
Practical funding steps include starting with a modest initial purchase to learn the mechanics, using regular small contributions to build positions, and applying dollar cost averaging to reduce timing risk over time. Check platform minimums and fees before funding any account, and confirm custody and transfer rules to match your plan FINRA.
A simple checklist to open an account: 1) Set a goal and time horizon, 2) Choose custodial or teen-linked account, 3) Gather ID and gift records, 4) Fund a small initial position, 5) Schedule regular contributions and review fees. These steps help keep the first moves low cost and educational.
How parents can support learning: guidance, oversight, and practice
Parents can teach investing basics without pressure by using short lessons and showing real account statements together. The SEC recommends starting with basic topics and supervising accounts so teens can learn while assets remain in protective custody U.S. Securities and Exchange Commission (Investor.gov).
Low pressure activities include simulated portfolios, small funded custodial accounts, or supervised trading where parents review choices and discuss outcomes. Evidence shows financial education improves knowledge and some saving behaviors, but follow up and practice matter for lasting habits Systematic review: Financial Education for Adolescents and Young Adults.
Decision checklist: custodial vs teen-linked accounts, taxes, and fees
Use a short decision checklist to compare account options: ownership and control, tax implications, transfer rules, platform fees and minimums, and parental responsibilities. FINRA and the IRS provide explanations that help families weigh these items before deciding FINRA and IRS.
When ownership and long term transfer matters, a custodial account may be preferable because the minor legally owns the assets at transfer. When goal is supervised learning without legal transfer immediately, a teen-linked supervised account can offer view and limited trading while keeping adult control. The CFPB guidance on accounts for kids and teens helps families compare those practical differences Consumer Financial Protection Bureau (CFPB).
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Check platform fees, custody terms, and current IRS kiddie tax guidance before funding an account to avoid surprises and to match an account choice to your goals.
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Before finalizing the decision, run through tax implications like the kiddie tax rules and consider whether smaller, educational investments make sense prior to larger gifts. Keep records of all gifts and contributions so tax reporting is straightforward if thresholds are exceeded.
Common mistakes and pitfalls parents and teens should avoid
Common errors include ignoring fees, frequent trading that increases costs, and chasing individual hot stocks rather than using diversified funds. High fees can erode returns over time, so choosing low expense options reduces that risk Vanguard.
Another frequent pitfall is neglecting tax reporting and record keeping for gifts and investment income. The kiddie tax can apply to unearned income, so keeping simple records and checking IRS thresholds prevents surprises at tax time IRS.
Mitigations include using low cost index funds, setting contribution rules to limit impulsive trades, and practicing with simulated portfolios before risking real funds. Regular review and a simple record system for gifts and trades make tax reporting easier later.
Practical examples and scenarios: ages 13, 15, and 17
Age 13 example: A teen who receives allowance and occasional gifts can start with a small custodial account holding a broad stock market index fund. Regular monthly contributions of modest size help the teen learn investing mechanics while keeping risk small. SEC guidance supports using custodial or supervised accounts for early practice U.S. Securities and Exchange Commission (Investor.gov), and families can also find ideas for how 13-year-olds can earn initial funds here.
Age 15 example: A teen with part time earnings could split contributions between a custodial account for long term goals and a simulated portfolio for learning trading. Using diversified ETFs for the custodial holdings keeps costs low while teaching allocation decisions Vanguard. Teens and parents can also review common part time work options for young workers online.
Age 17 example: Nearing the age of majority, a teen might focus on tracking progress, documenting gifts, and planning for ownership transfer. Families should review transfer rules so the teen knows when legal control occurs and what records will be needed for tax filings FINRA.
Teaching teens about risk, volatility, and time horizon
Explain volatility as normal ups and downs in market prices and frame time horizon as the length of time money will remain invested. For long horizons, diversified index funds tend to smooth short term swings compared with single stock exposure, which helps align expectations Vanguard.
Practical ways to practice risk tolerance include simulated portfolios, small real positions, and reviewing results over months rather than days. Remind teens that education improves knowledge but long term outcomes depend on continued learning and follow up Systematic review: Financial Education for Adolescents and Young Adults.
Tracking progress, transferring control, and updating plans
Custodial ownership typically transfers at the age of majority defined by state law, which is why understanding account transfer mechanics matters when planning longer term goals. FINRA details common transfer mechanics and why custodial ownership matters for that step FINRA.
Review allocations periodically and rebalance if they drift from target. Keep records of gifts and trades to make tax reporting and the later transfer smoother. As goals change, adjust the target allocation and contribution schedule to reflect new time horizons or changing risk tolerance.
When to get professional help: tax, legal, and complex situations
Consider professional advice when accounts hold larger balances, when trusts or complex gift situations are involved, or when you face unclear tax questions about a child’s investment income. The IRS guidance on kiddie tax reporting is a useful primary source to bring to a tax consultation IRS.
Bring documents such as account statements, records of gifts, and a list of questions about custody and transfer rules to a consultation. Verify credentials and use primary sources when making decisions based on professional input.
Conclusion: a simple, safe plan to begin
Start with small, practical steps: set clear goals, choose the account type that matches ownership and learning objectives, begin with low cost diversified funds, and keep records for tax reporting and future transfer. The SEC, FINRA, and major educators provide guidance that can help families decide and proceed safely U.S. Securities and Exchange Commission (Investor.gov).
Verify platform custody rules, fees, and current tax thresholds before opening an account, and treat the first investments as a learning step. With modest, consistent contributions and parental supervision, teens can gain important investing basics while keeping financial risk manageable.
Common options include custodial UGMA or UTMA accounts where an adult custodian manages assets until legal transfer, and supervised or teen-linked brokerage accounts that allow limited access while the adult retains control.
Not always; tax depends on the amount of unearned income and current thresholds. The kiddie tax can apply to larger unearned amounts, so check IRS guidance and keep records to determine filing needs.
Index funds and ETFs are commonly recommended as starter options because they are low cost and diversified, which can suit multi year time horizons and reduce single stock risk.
References
- https://www.investor.gov/financial-tools-resources/teachers/teach-your-children-about-saving-and-investing
- https://www.sciencedirect.com/science/article/pii/S0272775724000123
- https://www.finra.org/investors/learn-to-invest/advanced-investing-resources/custodial-accounts-what-you-need-know
- https://www.investopedia.com/terms/u/ugma.asp
- https://www.consumerfinance.gov/consumer-tools/banking/accounts-for-kids-and-teens/
- https://www.fidelity.com/learning-center/personal-finance/custodial-account-for-kids
- https://financepolice.com/advertise/
- https://www.troweprice.com/personal-investing/accounts/general-investing/ugma-utma.html
- https://www.irs.gov/newsroom/tax-on-childs-investment-income-kiddie-tax
- https://investor.vanguard.com/investing/investment-basics/young-investors
- https://financepolice.com/best-micro-investment-apps/
- https://financepolice.com/how-to-make-money-for-13-year-olds/
- https://financepolice.com/online-jobs-for-teens/
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