Teens are becoming increasingly financially savvy, but investing knowledge continues to elude them. It’s a pivotal knowledge gap—and one we hope to bridge by teaching you a little bit more about how to invest, and understanding what the best investments for teenagers are.
Fidelity’s 2022 Teens and Money Study provides a number of promising stats concerning teens’ financial literacy: 50% say they’ve used a payment app, 49% of those surveyed say they’ve opened a bank account, and 39% say they’re out there getting jobs.
But while many teens identify investing as an eventual goal—a whopping 91% told Fidelity they planned to in the future—most have so far not dipped a toe.
One major reason is structural: Minors can’t go out and just open their own brokerage account. Most of the remaining options for teen investing require a parent or custodian to sign off on everything, though there are a scant few options for teenagers who actually want to invest for themselves.
However, there’s also a knowledge barrier—many teens don’t know how to invest money, sure, but it also goes beyond that. Consider this:
- 55% say “investing is too confusing.”
- 47% say investing “feels out of reach” or “takes too much time/attention.”
- 42% simply believe teens can’t trade stocks.
- 72% say they have “no” knowledge of trading stocks and exchange-traded funds (ETFs).
We have some good news, though: Teens absolutely can invest in the stock market, ETFs, and other products, and we can help make it a lot less confusing for you.
Today, we’re going to talk about the best investments for teenagers. We’ll also look at the varying types of accounts teens can use to get started, and answer a couple of other frequently asked investing questions to help clear up any of the confusion you might have.
Investing for Teenagers—Our Top Account Picks
Open a Fidelity® Youth Account for your teen, and Fidelity will drop $50 into their account. Get $100 for yourself when you open a new Fidelity account and fund with $50¹.
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The Best Investments for Teenagers (Under 18)
We’re going to dive into seven popular, typically easy-to-access assets that teenagers can buy in their own investment accounts, or that parents can hold for their teens.
And importantly, when we’re talking about teens, we’re talking about teens younger than 18. At age 18, all of the guardrails come off; you can invest in virtually anything once you become an adult. (If you’re looking for investment ideas for that age group, we’ve got you covered here with our suggestions for the best investments for young adults.)
Stocks are one of the best investments for teenagers for a number of reasons. Among them:
- They have higher rates of returns than just about any other asset class.
- They can be held in numerous types of investment accounts.
- They’re often understandable and relatable.
In short, a stock is simply a piece of ownership in a company. It allows you to profit from a company’s success—most commonly, from price appreciation in shares of the stock, but in several cases, also from cash distributions (dividends) the company makes to shareholders.
When you’re learning to invest as a teenager, stocks that can both grow and pay dividends are the ultimate holding given just how much in additional returns they can generate over the long term.
Here’s a look at the return someone could expect if they received just the price returns from the S&P 500 over the past 25 years:
Now look at how much better the return is when you factor in dividends (had you had reinvested those dividends back into the S&P 500):
The price return is about 4.5x. The total return (price plus dividends) is more than 7x!
We tend to believe that the best investments for teens include stocks from companies they interact with. This will make a teenager more likely to care about and follow the company’s progress over time.
All of the teenage investment plans mentioned throughout this article will allow you to hold stocks in some form or fashion, whether that’s through individual stocks, or mutual or exchange-traded funds. That includes this teen-owned brokerage account:
Fidelity® Youth Account ($50 bonus for teens, $100 bonus for parents)
- Available: Sign up here
- Price: No account fees, no account minimum, no trading commissions
- Promotion: Teens get $50 on Fidelity® when they open an account; parents get $100 when they fund a new account
Is your teen interested in jumpstarting their financial future? Do you want them to build smart money habits along the way?
Of course you do! Learning early about saving, spending and investing can pay off big when you start on the right foot. And one tool that can help your teen get that jump is the Fidelity® Youth Account—a brokerage account owned by teens 13 to 17 that’s designed to help them start their investing journey. They can use their own brokerage account to start their investing journey by trading most U.S. stocks, exchange-traded funds (ETFs), and Fidelity mutual funds in their accounts.
Your teen will also get a free debit card with no subscription fees, no account fees, no minimum balances, and no domestic ATM fees. And they can use this free debit card for teens4 to manage their cash and spend it whenever they need.
And as for building smart money habits? You and your teen can access Fidelity’s Dedicated Youth Learning Center, which is packed with materials developed specifically to help teens develop good financial habits.
Controls Parents Want and Need
A parent or guardian must have or open a brokerage account with Fidelity® to open a Fidelity® Youth Account. For new Fidelity® customers, opening an account is easy, and there are no minimums and no account fees.
Parents and guardians have plenty of tools they can use to monitor their teen’s activity: They have online account access, can follow monthly statements and trade confirmations, and can view debit card transactions made in the account.
To make it even easier, you can set up alerts to notify you of trades, transactions, and cash management activity, keeping you firmly in the loop on actions your teen takes across the Fidelity® Youth Account’s suite of products.
If your teen has an interest in learning about investing and taking their first steps toward building their financial journey, you should consider opening a Fidelity® Youth Account. The account comes custom-built for their needs, which will help them become financially independent and start investing for their future.
Read more in our Fidelity Youth Account review.
2. Mutual Funds
Stocks are great, but you can put yourself at great risk if you spread your investment money across just a handful of them. Think about it: Companies do fail, and when they do, their stocks can go to zero. Well, if you have $10,000 invested evenly across just four stocks, and one of them goes to zero, your whole investment account has just lost 25% of its value!
So while teens have longer to make up for mistakes than anyone, not every teen wants to accept a ton of risk. That’s why we also suggest mutual funds.
Mutual funds are a pool of money, gathered from a large group of investors, that is invested in a large group of assets—typically stocks, bonds, or a combination of the two. A mutual fund might have a portfolio of dozens or even hundreds of stocks, so by investing in the mutual fund, you’re investing in that wide portfolio of stocks.
This provides an important quality called “diversification.” Diversification is reducing your risk by spreading out your money across many different investments. And you can diversify in a number of ways, such as holding:
- Different stocks in one area of the market (say a sector, such as technology)
- Different stocks across different sectors
- Different stocks across different countries
- Even different assets (say, stocks, bonds, and commodities like gold or oil)
Here’s how it works.
Let’s say you buy a mutual fund at $50 per share. That price is the net asset value (NAV) of the fund—the value of all the securities (stocks, bonds, etc.) held by the fund—divided by the number of shares that exist. When the value of those securities changes (i.e., when stock or bond prices go up or down), the NAV is adjusted accordingly. This price changes at the end of each market trading day.
Also, some funds are operated differently than others. The two primary types of fund, by management, are either actively managed and passively managed.
Most mutual funds are actively managed, which means that they’re run by one or more people. These fund managers buy and sell investments based on their stock research and the fund’s investment strategy. These portfolio managers are typically tasked with beating some sort of comparable benchmark, like, say, the S&P 500 Index, or the Bloomberg US Aggregate Bond Index.
However, some mutual funds are passively managed, and these are often referred to as index funds. As the name suggests, rather than trying to beat a benchmark like the S&P 500, index funds typically follow all the rules a particular index does, providing you with similar investment returns. Because they’re usually run by computer algorithms, rather than human managers, investing in index funds provides similar diversification with typically lower expenses.
You can hold a mutual fund in a number of investment accounts, including individual retirement accounts (IRAs), 529 plans, and education savings accounts (ESAs). Don’t know what these accounts are? Don’t worry—we’ll be covering them in a minute!
529s With Backer
- Available: Sign up here
- Price: $3/mo. (one child), $6/mo. (multiple children)
A great option to consider is Backer. Backer, a hassle-free 529 Savings Plan where your family and friends can play a role, has helped families save over $20 million towards college in just minutes.
You can use the 529 plan to put your child on track to afford college; all while remaining invested in an asset class that will grow over time.
You are able to invest using Backer’s portfolio of low-cost index funds including: large company stocks (S&P 500), small cap stocks (Russell 2000) international company shares (MSCI EAFE Index), U.S. government bonds (Barclays Aggregate Bond Index).
3. Exchange-Traded Funds
If you want to invest as a teenager, chances are you’re going to want to get cozy with mutual funds’ cousin: exchange-traded funds (ETFs).
ETFs are similar to mutual funds in that they hold a typically diversified portfolio of stocks, bonds, and/or other investments. But ETFs have become much more popular over the past couple decades because of how they differ from traditional funds.
For one, ETFs don’t settle just once a day—instead, they trade on the stock market exchanges during regular trading hours. This makes them popular among people who want to trade them quickly in a brokerage account.
Also, unlike their mutual-fund brethren, which are primarily actively managed, most ETFs are index funds. ETFs tend to be much cheaper on average as a result. (However, even actively managed ETFs can be cheaper than comparable mutual funds.)
You can also see what an ETF holds on any given day (versus just a quarterly snapshot for mutual fund holdings), and ETFs also boast certain tax advantages that also help their returns versus similar mutual funds.
- Available: Sign up here
- Price: $5/mo. (Included with Personal Plus plan)
Acorns offers a custodial brokerage account for parents and grandparents interested in opening an investment account for their family called Acorns Early.
Acorns Early offers investment portfolios of various risk levels for kids, so you can feel confident in the account you’re opening up for your little one. This app can be a great way to teach minors how to start investing money.
The best part about Acorns is that it doesn’t require any minimum deposit to get started and allows you to contribute money on a regular basis.
One of the best ways to start saving for your grandchild is through a savings and investing account product like Acorns Early.
Read more in our Acorns review.
Bonds are a typically lower-return (but also lower-risk) investment than stocks. A bond is basically a loan you’re making to some sort of entity—typically a company or some part of the government. When you buy the bond, that entity promises to pay you back, with interest, within a certain period of time. The entity typically pays that interest to you on a regular basis, often every six months.
Most bonds are difficult to research and purchase individually, so teenagers (and most investors, for that matter) are better off buying them through mutual funds and ETFs. This lets you diversify by purchasing exposure to hundreds or even thousands of bonds at a time.
One type of bond that’s easier for most people to buy individually is a savings bond, which you can now purchase by visiting TreasuryDirect.gov. Unlike most other bonds, the principal (your original investment) and interest are all paid at once, when you redeem the bond.
The two available savings bonds are Series EE and Series I. The U.S. Treasury guarantees that your investment in Series EE bonds will at least double if you hold it for a full 20 years. Series I savings bonds are meant to protect your savings from inflation (rising prices): They deliver both a fixed interest rate, as well as an inflation-adjusted interest rate that’s calculated twice each year.
However, the only way teens can get their hands on a savings bond is for an adult to gift them one. You must be at least 24 years old to purchase savings bonds.
5. High-Yield Savings Accounts
High-yield savings accounts, as you might guess given their name, offer much higher interest rates (often by 20x to 25x) than traditional savings accounts.
And that’s it! There are no other differences! You typically get an ATM card with the account, and you can deposit and withdraw money as you please.
High-yield savings accounts are one of the safest ways to invest your money, with most banks offering Federal Deposit Insurance Corporation (FDIC) insurance of up to $250,000 per account. In short: If your bank fails, you will still be repaid whatever was in your account, up to that $250,000 limit.
The downside? Savings account yields aren’t guaranteed. Interest rates fluctuate over time, and as they go up and down, so too go savings rates. Also, while high-yield savings accounts offer much higher rates than your average savings product, their potential upside is usually far lower than stocks, bonds, and many other investments.
So what’s the use case? High-yield savings accounts are the best investments for teens who are looking to make a little extra money on cash that they might need to withdraw at any time.
6. Certificates of Deposit (CDs)
Certificates of Deposit (CDs) are another savings product offered by most banks and credit unions.
Like savings accounts, CDs are virtually risk-free and insured for up to $250,000. But unlike savings accounts, they’re a longer-term commitment. With a CD, you lend money to a bank for a set amount of time (the “term length”)—usually between three months and five years. And typically, the longer the term length, the higher the interest rate you can get.
You’ll typically get a higher rate with CDs than with a high-yield savings account, but if you take your money out early, you’ll face a penalty. So, a CD makes the most sense for a teenager who won’t need their cash immediately, but will need it at some defined point in the short-term future, and wants to make a little extra money off that cash until then.
Roll your eyes all you want. “Investing in yourself” might sound a little cheesy, but it can be one of the best ways for a teen to grow their money—while teaching them valuable lessons about entrepreneurship and preparing you for adulthood.
We’ve previously written about ways to make money as a teenager. Some of them are just plain ol’ work—nothing wrong with that!—but one method in particular has the potential to be so much more.
Running your own business, whether online or offline, will cost you money at some point—you might need to provide your own funds to start with, or you might need to reinvest your business’s profits back into the business to make it grow. None of this is specific to teens—it applies to everyone—so experiencing this dynamic when you’re young can give you priceless real-world experience you can use for the rest of your life.
You also don’t have to invest money in yourself—you can just invest time. Putting the effort into your homework, or going the extra mile to learn more outside of school, can have any number of benefits, from getting you into a better college to making you a more attractive job candidate to simply making you happier because you enjoyed learning something new.
Related: Best Ways to Save Money as a Teen
Investment Accounts for Teens: Which Assets Should You Put in Each?
If you want to invest in virtually any asset, you have to have an account that allows you to do so. If you go to your bank and open up a savings account, then say, “I’d like to put a few stocks in here,” you’re going to get a few funny looks.
So now, we’re going to go through the most popular types of accounts for teen investors—this includes accounts where teens have control, as well as accounts where teens can give input but ultimately are controlled by a parent or custodian.
1. Joint Brokerage Account
When you open a brokerage account for yourself, you open an individual brokerage account. Only your name will appear on the account title as the owner. Conversely, if you decide to open a brokerage account jointly with two or more people who share in account ownership, you’re opening a joint brokerage account.
Brokerage accounts typically exist between spouses, and can even be opened by two or more individuals who share financial goals (say, unmarried partners or business partners). But joint brokerage accounts also can be opened between multiple family members (say, a parent and teen).
When a parent and teen have a jointly owned brokerage account, they can share in the decision-making of what to buy and sell. And opening one is easy: Many investing apps for teens allow you to open a joint brokerage account.
Financial assets you can hold within a joint brokerage account:
- Mutual funds
2. Custodial Account
Parents interested in investing on behalf of their teens often use a custodial account. Custodial accounts allow an adult to maintain financial assets for another person, usually a child. The assets held in the account are owned by the beneficiary but managed by the custodian—however, they can get a teen involved by talking to them about (or even having them help make) investment decisions in the account.
When the child reaches the age of majority (generally 18 or 21, but sometimes as old as 25) the assets held in the custodial account revert to the owner’s control. The account owner can withdraw money from their custodial brokerage account for any needs they may have.
Custodial accounts come in two types: Uniform Gifts to Minors Act (UGMA) accounts and Uniform Transfers to Minors Act (UTMA) accounts. You can check out the full breakdown of UGMA vs. UTMA, but most important is that UGMA accounts can be used to hold financial assets. UTMA accounts can hold financial assets, too, but also any property—say, real estate or cars.
Financial assets you can hold within a custodial account:
- Mutual funds
- Life insurance policies
3. Custodial Individual Retirement Account (IRAs)
Individual retirement accounts allow you to set aside earned income toward your retirement savings in a tax-smart way. These accounts come in two primary forms:
- Traditional IRA: If you contribute to a Traditional IRA, you set aside pretax dollars that invest over time, allowing you to take a tax deduction now. However, you will have to pay taxes when you withdraw money later.
- Roth IRA: A Roth IRA allows you to invest after-tax dollars. By contributing to this tax-advantaged savings account, your Roth IRA contributions can grow tax-free. You can also withdraw from your Roth IRA without paying taxes.
Both accounts come with annual contribution limits equal to the lesser of your earned income or $6,000 per year in 2022. If you’re 50 or older, you can contribute an extra $1,000.
Naturally, if you’re talking about teen investing, the IRA will have to be custodial in nature, which means an adult is in charge. By contributing more money now toward retirement, a teen stands to realize more upside potential through compounding returns. A teen doesn’t even need to contribute the money themselves. Instead, they can keep their earnings and have family and friends make contributions to their IRA up to their earned income in the year of contribution.
When investing money in an IRA, you’ve got several types of investment strategies you can utilize for securing your financial future. IRAs offer access to assets extending beyond just traditional classes, such as alternatives.
Financial assets you can hold within an IRA:
- Exchange-traded funds
- Mutual funds
M1 Finance—Best for Custodial IRAs
M1 Finance is an all-in-one personal finance solution that allows new investors to set up an account in seconds.
If you want to use this as a teen investing app, you’ll need to apply for an M1 Plus subscription. The online discount broker has a limited time offer of the first three months for free ($31.25 value).
The service offers investors the ability to create Portfolio Pies, or a diversified portfolio that rebalances to help you achieve your money goals.
M1 Finance is a service designed for self-directed investors by offering flexible, customizable and automated financial solutions. The platform manages your money intelligently based on how you want.
Consider signing up for an M1 Finance custodial account or custodial IRA today.
4. 529 Plans
529 plans are a special type of tax-advantaged investment account that adults can use to save for their children’s educational expenses. The account allows you to contribute after-tax dollars that grow tax-free if used to pay for qualified education expenses for a designated beneficiary.
While parents typically establish these funds for children when they’re young, giving them a long time to grow their investments, it’s never too late to save—you can certainly open up a 529 for your teen. Like with custodial accounts, parents control the account, but they can absolutely let their child or teen help make the investment decisions.
These investment vehicles are set up to defray the costs of formal education (keeping your child from piling up student loan debt) and have minimal impact on your financial aid eligibility. You’ve got two types of 529 plans:
- College savings plans: These accounts work much like a Roth IRA or 401(k), allowing you to invest after-tax dollars into mutual funds and other investment options. Your contributions grow tax-free, but how much they grow will depend on the performance of the investment options you choose to hold in your account.
- Prepaid tuition plans: Prepaid tuition plans allow you to pay all or a part of your public in-state college education costs. Generally, you can also convert the money to go toward a private or out-of-state college as well.
529 college savings plans offer a more limited universe of investment options as compared to joint brokerage accounts, custodial accounts, or IRAs. Most offer access to mutual funds administered at the state level, meaning each state offers different investment options. However, you can choose to invest in one state’s funds and still use the proceeds to send your child to a college in a different state.
Financial assets you can hold within a 529 plan:
- Mutual funds
5. Coverdell Plans
A Coverdell education savings account (ESA) is a custodial account or trust created to pay for a designated beneficiary’s educational expenses. Coverdell ESAs are lesser-known than 529 savings plans, but they work similarly. And again, a parent or custodian has authority over the account, but they can keep their teen involved with investment decisions if they choose.
Coverdells also offer tax-free earnings growth and tax-free withdrawals, as long as the funds are spent on qualified education expenses.
However, the benefit doesn’t apply only to higher education expenses. Qualified elementary and secondary expenses count as well.
The account must be established prior to the beneficiary becoming an adult, unless the recipient has special needs. Contributions must be made in cash and aren’t deductible. Total contributions to the beneficiary can’t exceed $2,000 in any given year.
Financial assets you can hold within a joint brokerage account:
- Mutual funds
Frequently Asked Questions
How Much Money Does a Teen Need to Start Investing?
This varies widely, even within the same account type—for instance, some 529s might have larger minimum initial investments, and some might not at all. Typically, within a brokerage account, the minimum cost is the price of one share of a stock or ETF, or the minimum investment required by a mutual fund. However, if your brokerage account allows you to buy fractional shares, you might be able to invest with as little as $5 or even $1.
What Investment Accounts Let a Teen Invest By Themselves?
The Fidelity Youth Account is a rarity in that it’s teen-owned, which means the teen can make all of the decisions on their own. The next-closest thing would be a joint brokerage account, where an adult and a minor have equal ownership of the account—of course, in that scenario, if one person makes decisions the other person doesn’t approve of, an uncomfortable conversation might be in your future.
What Is the Best Investment Account for a Minor?
The answer to this question largely hinges on the investing goal, and how old the minor is. For instance, users have the most control with the Fidelity Youth Account, but it’s only available to minors age 13 to 17.
If you’re setting up an account to save for a minor’s educational expenses, 529s and Coverdells are designed specifically for that purpose. Custodial accounts are ideal if you want to save money on behalf of a child for more general goals—possibly education, but also a car, a home, day-to-day expenses, etc. Custodial IRAs are best for investing a teen’s earnings from a job. And a joint brokerage account is the best way to involve a minor in the investing process while still keeping one hand on the wheel.
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