Once you get a custodial taxable or IRA account, you need to decide what kind of investments to put in there.
There are many different types of investments you can choose from, from simple-to-understand equities to complicated derivatives. We think it’s best to start simply.
1. Start With Stocks
You don’t have to be a rocket scientist to start investing in stocks. In fact, by researching stocks and selecting which ones to invest in, you’ll learn a lot about how the stock market works. Overall, this process is incredibly valuable for teenage investors since you can learn more about how the market works and some important investing terms.
To start out, consider choosing a company that you enjoy and — most importantly — trust. It’s fun to be able to say you own part of a stock like McDonald’s and The Walt Disney Co. But these have historically been steady earners, too.
Consider investing in a few of the stocks on the Dividend Aristocrat list. There are names you’ll recognize, such as Coca-Cola and Target. These are companies that have proven histories of increased dividend payouts. That means, on top of the gains you’ll get when you eventually sell the stock, you’ll also receive cash distributions on a quarterly or annual basis.
If the big corporations wig you out, you can also put your money into helping strengthen sustainable industries and supporting the littler guys.
2. Move on to Low-Cost Mutual Funds
Once you understand stock trading basics, you might want to consider investing in some low-cost mutual funds. Mutual funds are collections of individual stocks. Because there are several stocks in each mutual fund, you do not depend on just one company to earn gains. So you can spread your risk out, rather than putting all your eggs in one basket.
The best mutual funds for new investors include diverse stocks that give you broad exposure to different industries and markets. Many of the stock brokers we’ve discussed offer their own mutual funds, so you won’t have to pay hefty commissions when you buy and sell these investments.
3. Open a High-Yield Savings Account
If you can’t convince your parent or guardian to open a custodial stock broker account for you, consider asking for a high-yield savings account instead. Although you won’t earn the potential gains you can get from the stock market, savings accounts are a low-risk way to earn steady money from compound interest.
Now, the interest rates you’ll find at your local bank branch won’t be much to write home about. However, online-only banks offer rates that can be up to 20 times higher. That’s because they don’t have the overhead costs of maintaining brick-and-mortar locations.
4. Use a Microsavings App
Finally, if you have your own checking account, you can link it with a microsavings app. With these services, you can save and invest the change from every purchase made with your debit card.
Say you buy a soda and a bag of chips every day after school for $2.68. You can set the microsavings app to round up to the nearest dollar, so 32 cents will automatically hit your investing account. Sure, that’s a tiny amount of money, but when it’s done 20 days a month, that turns into more than $6 per month. That can add up over time, and you can invest that money for bigger gains.
Acorns is a particularly good microsavings app for teens. There’s no minimum amount required to start saving, and there are ways to save extra money. Your parents can set up an account for themselves and you for only $5 a month with an Acorns Family account.