Investing: As a Minor

Please note: The information provided does not constitute legal or financial advice. Readers are strongly encouraged to conduct their own research and exercise due diligence before making any decisions based on this content.

If you won the lottery today, what is the first thing you’d buy? Surprisingly, only 15% of US residents would opt to "invest." But what does that mean? Where would you even start, and how can you ensure it's secure? Let's dive into how you, as a minor, can bank, invest, and learn about the investment market— whether it be stocks, crypto, bonds, and even real estate.

Financial Activity

As a minor, you may feel restricted when it comes to investing and building a portfolio. However, using the right platforms and understanding regulations will grant you access to a plethora of investment opportunities that you might not have known about. Simply understanding the different types of equity can place you ahead financially compared to most. In this article, we will explore how you, as a minor, can bank, invest, and diversify your investments.

How to Bank

Teen Checking: Banks such as Capital One, Wells Fargo, and Chase offer joint/co-op bank accounts for teens age 13-17. The account will be in the name of both the parent/legal guardian, and child. As a co-owner the account will be in full control of the child upon their 18th birthday unless stated otherwise. Teen Checking offers 0.10% interest rate, minimums vary.
Savings Account: Capital One offers a savings account to any minor under 18, the account must be opened with the contractual agreement of a parent but is not owned by the parent. Capital One’s “Kids Savings Account” offers a 2.50% APY.

*Credit: Andrew Rich, RichVintage, Getty Images*

Accessing the Stock Market

Now that you have opened a bank account, you may want to invest your newly deposited money into the stock market. Before you invest, let's briefly go over one of the most common places to invest, stocks, which are ‘bits’ of companies that you can buy. If the company does well, your bit gains value. If not, it might lose value.

Blue Chips: Blue chips are stocks of large, well-established companies with a history of stable performance. Examples of blue chip stocks include companies such as Apple, Amazon, Coca-Cola, and Toyota— all considered reliable and leaders in their respective industries.
Penny Stocks: Penny stocks are shares of small, usually low-priced companies. They're more volatile (susceptible to rapid price fluctuations) and thus risky, often trading for less than $5 per share. Examples include: Hecla Mining, Curaleaf Holdings, and many more. Often these companies require extra due diligence and research as they may be small, obscure and possibly new.
ETFs: Exchange-Traded Funds are collections of stocks, bonds, or other assets bundled into a single investment. They're traded on exchanges like stocks and offer diversification in a single investment. Some may hold tech-related equities only, health-related equities, or a mix of industries; ETFs are often a good reflection of an industry’s performance. The most famous ETF is the SP500 (Ticker: SPY) which holds varying amounts of the top 500 companies on the market.
Dividend Aristocrat: Dividend aristocrats are companies in the stock market that have consistently increased their dividends for a minimum of 25 consecutive years. (Dividends are returns on investment that a company may distribute as an incentive to buy their shares). Aristocrats such as Walgreens, 3M, and Chevron have continued to be favorites for dividend traders.
IPO: Initial public offerings are when a private company offers its stock to the public for the first time, allowing individuals to buy shares and become part owners of the company.
Mutual Funds: Pooled money from multiple investors used to buy various assets like stocks and bonds, managed by professionals for diversification. Each institution often has its own fund, the biggest include the Vanguard 500 Index Fund Admiral Shares, and JPMorgan Income Fund.
Commodities: Basic goods like metals, livestock, and energy (oil & gas) traded for profit. Prices change due to market shifts and external factors like weather or politics. Commodities are traded in a couple of different ways, one way is using reserves: a bank, or trust will hold the gold, petroleum, or good, in a reserve and you, as the trader, will be buying/selling the contract to own the commodity, the given contract can vary from 1 oz of gold to 100 barrels of diesel and it’s price adjusts accordingly. The second way to trade commodities is to essentially place a “bet” on the price of livestock or goods, such as wheat, sugar, or even water. Brokerages allow you to speculate on prices as you would shorting/longing the price of a stock.

To access the market, the best and most reliable course of action is to open a custodial account. With a custodial account, you can open a brokerage account under the name of your parent, in which the deposited money and consequent investments will legally belong to you once you reach legal adulthood (varying depending on state/country). Although a custodial account is meant to be managed by the custodian, there is no legal restriction stating that the beneficiary may or may not make trades on the account. Custodial accounts are offered by all major banking institutions, notably Charles Schwab, Fidelity, Vanguard, Goldman Sachs, and JP Morgan & Co (restrictions vary).

Cash Markets

Trading and investing doesn’t have to be done exclusively with equity, investments can also be done with cash, whether that be in the US dollar or any other currency. Bonds and CDs, which can be purchased on custodial accounts, have varying risks and rewards.

Bonds:

Types: Government bonds (issued by governments), Corporate bonds (issued by companies), Municipal bonds (issued by local governments)

Definition: Bonds are debt securities where investors lend money to an entity (government or corporation) in return for periodic interest payments and the return of the initial investment at maturity.

Risk and Rewards: Government bonds are considered low risk (especially AAA-rated), offering fixed interest but lower potential returns compared to riskier corporate bonds.

Certificate of Deposit (CD):

Definition: A time-bound savings account with a fixed interest rate and fixed date of withdrawal (maturity date).

Risk and Rewards: Low risk as they're FDIC insured, but limited liquidity. Example: A 5-year CD might offer higher interest than a regular savings account.

High-yield Savings Accounts:

Definition: Savings accounts with higher interest rates than standard accounts, often offered by online banks.

Risk and Rewards: Relatively low risk, but returns might not beat inflation. Example: Online banks might offer high-yield savings accounts with competitive rates.

Effect of Federal Interest Rates:

Bonds: Higher federal rates can decrease bond values as new bonds offer higher returns, impacting existing bond prices inversely.

CDs & Savings Accounts: Rates tend to increase with federal interest rate hikes, benefiting savers.

Example:

Investing $10,000 in a AAA-rated US Treasury bond might yield 2% annually, ensuring stability but lower returns compared to a corporate bond with a 5% yield, which carries higher risk due to the company's financial health.

Real Estate Markets:

Traditionally, real estate is the crème de la crème of all investments one can make, and therefore it’s generally reserved for the wealthy. Investing in real estate requires hefty minimums, and complicated legal regulations that a minor simply can’t legally navigate. Or so you were told…

Although direct investments in real estate projects or buying land isn’t possible as a minor, you can still invest in REITs, REITs (Real Estate Investment Trusts) are like the "real estate version" of stocks. They're companies that own, operate, or finance income-producing real estate across various sectors like apartments, offices, or shopping centers.

REITs allow investors to own a slice of real estate without the hassle of buying properties. When you invest in a REIT, you're essentially investing in a portfolio of properties managed by that REIT.

Rewards: They often provide regular income through dividends, and their value can appreciate if the real estate market performs well.
Risks: Market fluctuations can impact their value. Economic downturns or rising interest rates might affect property values, impacting REITs.

Overall, REITs offer a simple way to invest in real estate without dealing with property management. They can provide dividends and potential capital appreciation but are also subject to market risks tied to the real estate industry.

Emotional Control

"It’s an easy game, if you can control your emotions." – Warren Buffett

In all investments, you should disconnect money from investing— that sounds crazy right? When trading/investing, you must look at the numbers on the screen as just that, numbers on a screen, don’t think in terms of money. Money is often intertwined with our emotions, regardless of whether you think you're a monk: losing or gaining money will affect your emotions. If money triggers emotions, the goal should be to detach from it. You will make the most of your investments, once you think clearly and rationally. If the gain/loss of money is always looming over you, you are surely prone to bad decisions.

Before placing a trade, understand that your success and failure is solely dependent on you and your ability to make an accurate analysis. The earlier you hold responsibility for this fact, the faster you will learn. Identify your risk tolerance and know that true education takes time, trial, and error.

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