One of the best ways to help your children attain financial success in the future is by teaching them the importance of investing. However, a lot of parent are apprehensive when it comes to talking to their kids about key financial concepts. In fact, Your Teen Mag’s article on teenage finances notes that almost two-thirds of parents would rather talk to their children about sex than money.
It’s important for kids to start investing because they hold an incredibly powerful and valuable gift: time. Through compounding, the money your child invests early in life will have more time to grow. But of course, there are some complications that make it difficult for minors to get into investing. For one, it’s hard to fully comprehend the ins and outs of finance and investing — even for most adults. In addition, there are a few restrictions that hinder minors from participating in different financial markets.
In this post, let’s discuss how minors can start investing in one of the most popular financial assets available today: stocks.
How old do you have to be to start investing in stocks?
Here’s the thing: one needs to be at least 18 years old in order to invest in stocks. Don’t be fooled by the interactive and easy-to-use interface of stock investing apps such as Robinhood and Webull. These platforms are very thorough and require documents to verify the identity of a user. To legally participate in the stock market, minors need the guidance and permission of a parent or guardian in order to open a particular investing account called custodial accounts.
What are custodial accounts and how do they work?
In essence, a custodial account is a type of financial account that adults can open and administer for minors. Opening an account on your child’s behalf means that you’re entering a fiduciary relationship with them. With a custodial account, you’re tasked with making sound decisions with your child’s account and managing their money in their best interest. Custodial accounts don’t only help you secure your child’s future, these are also a great way to help your child understand the importance of investing and being financially responsible at a young age.
There are two basic types of custodial accounts. The first one is the Uniform Gifts to Minors Act (UGMA) account. With a UGMA account, the money inside the account is controlled and managed by the adult. The custodian can also donate gifts to the child through the UGMA account, such as life insurance, stocks, and annuities. The second type of custodial account is the Uniform Transfer to Minors Act (UTMA) account. These kinds of accounts give more time for control to the custodians and allow for more assets to be stored. In addition, the minor cannot access the funds inside the account until they reach a certain age mandated by the state — and for some states, this could reach up to 25 years.
Helping minors protect their investments
The best way to help your child protect their investments is by making sure that they understnad the basic concepts in financial literacy and shares trading. Be sure to read in-depth manuals such as the shares trading article here on The Merry Markets, and use it to guide your child in the daunting world of stock investing. If they’re old enough to comprehend basic financial terms, you can buy them investing books that are meant for beginners. Azminoor Rahman lists some of the best investing books on Medium, such as Benjamin Graham’s The Intelligent Investor and Joel Greenblatt’s The Little Book That Beats the Market.
Since you’ll most likely oversee and manage the investments of your child, you should also avoid focusing your child’s investment portfolio on one asset class. Venturing out of stocks and diversifying your child’s investment portfolio allows you to safeguard your child’s money. One asset class that you should strongly consider are gold ETFs, which allow your child to invest in gold without actually holding it. A list of the top gold ETFs by Wealthsimple highlights that they are a great way to diversify your portfolio as you invest in gold-backed assets instead of the physical metal. Mutual funds are another asset class that you should try to include in your child’s portfolio. The Economic Times defines mutual funds as a professionally-managed investment scheme that invests a group of people’s money in a variety of securities. Mutual funds are a great way to help you diversify your child’s portfolio and allows them to access securities that would otherwise be impossible to invest in with their limited capital.
It’s important to let your kids be responsible and allow them to take charge of their financial future — and one way to do this is by teaching and encouraging them to invest in stocks. So, be sure to heed the tips and advice we’ve discussed above to give your child a jump start in stock investing.
