Learn how to start investing in high school

I am often asked how to start investing in high school. It’s a tough question because I’m a firm believer in investing as early as possible.

However, it really is a bad decision for minors to own stocks. I think if you want to teach kids to invest, you have to start with how investing through a low-cost index fund is the way to go (just look at Warren Buffett). Only then should you teach them to look at individual stocks.

So that doesn’t mean you can’t start investing in high school! It just means they start investing in high school the right way!

The Legality of Investing as a Minor
First, I am not a lawyer or accountant, so consult all relevant professionals before doing anything related to opening an account. However, I can tell you the following truths:

Minors can own shares in their name (contrary to popular belief).
Minors cannot open a brokerage account as they cannot legally sign for themselves and transfer agents cannot accept a minor’s signature to complete transactions.
Minors can have custody accounts (UGMA accounts) opened in their name.
Minors can have a Roth IRA if they have income.
This may sound counterintuitive, but realize that nothing can stop a minor from owning a stock. However, the minor cannot complete the transaction on their own – they must have their legal guardian do it. If the shares are in the minor’s name, neither the guardian nor the minor can transact in them.

This is why UGMA accounts were created. The assets (stocks) held in the account are in the minor’s name, but the listed trustee may transact on the minor’s behalf until he or she is of legal age to transact on his own behalf.

How then can minors open a Roth IRA? Well, technically the Roth IRA is just an account. . . no investments have to be made. The only qualifier for a Roth IRA is earned income that meets established Adjusted Gross Income (AGI) limits. Just like the UGMA account, a parent or legal guardian must act as guardian until the child comes of age. The other great part of the Roth IRA is that technically it doesn’t matter who contributes – so a parent or other relative could also contribute to the Roth IRA on behalf of the child.

TD Ameritrade, my broker of choice, offers UGMA accounts and Roth IRA custody accounts with no minimum investment or annual fees. TD Ameritrade is also great because they offer a great step-by-step package for parents and teens.

Another great app for early investing is Stockpile. Stockpile makes investing in individual stocks really easy for kids (they call them Mattel Barbie for example) and they also give you $5 in stocks for free for signing up. View stock here.

The true aspect of investing in high school
Legalities aside, most teenagers just want to experience investing. Parents and teachers can help with this.

At home
If kids have accounts set up in their names at home, let them see the investments and even have a say in the decision making. This can be a great teaching opportunity and also teach real responsibility. Empowering teenagers to manage their own investments will set them up for long-term success.

If they don’t have an account, now might be the time to open one to invest in. Let them learn about the stock market and actual investing. When they have some money saved, you can open them a UGMA account if they have no income, or a Roth IRA if they have a summer job that paid them W-2 or 1099 earned income.

Then let them do their research and invest in a company or index fund of their choice. Help them monitor their positions and educate them about dividends, capital gains and taxes.

Finally, I also recommend that parents share their own investment accounts with their children and explain to them what they are and how they work. Show them your 401(k), IRAs, brokerage accounts and anything else you have. Information is power, and teaching your child how to invest early is a smart move.

Invest in high school
We’ve highlighted colleges here that have hedge funds, but now many high schools are opening funds for their students to learn and invest in. Additionally, FINRA has a 4-H program designed to educate high school students about stock investing and other aspects of personal finance.

Programs like these can get your high school student thinking about investing, and it’s legal and useful!

My story
I know when I was in high school my parents showed me and gave me access to several UGMA accounts that were opened on my behalf by my grandparents when I was a baby. Most of the time the money was there and my parents didn’t do anything with it. However, they taught me how to track fund performance and helped me set up Quicken for the first time. Since then I’ve been addicted to personal finance.

I highly recommend investing in high school even if you only have $100 to get started. Understanding by doing is so important. It also put me on the path to financial independence in my 30s.

The earlier you start investing, the better your children will learn how to build wealth.

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