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investing

How Kids Can Start Investing

A parent or other adult needs to manage a custodial account, but most brokerage firms offer the same investing choices, commissions and fees for custodial accounts as for regular accounts.

Question: I am 16, and I'd like to start investing in stocks. I don't have any income, but my parents are supportive. How can I open an account and start trading?

Answer: That's great to hear that you're interested in learning about investing at age 16! Because you're younger than the age of majority (generally age 18 or 21, depending on the state), you'll need to open a custodial account, with an adult as the custodian. The custodian will need to complete the paperwork and manage the account, but the money can only be used for your benefit -- the custodian can't withdraw money and give it to anyone else. You'll take total control of the account when you reach the age of majority.

Until then, you can work with the custodian to research stocks and choose investments. Most brokerage firms offer the same investing choices for custodial accounts as they do for their regular brokerage accounts, and the fees and commissions are generally the same, too. For example, Schwab and Fidelity charge $4.95 for most stock trades and offer free trades for some exchange-traded funds.

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Many firms have the same minimum investing requirement to open a custodial account as they do for a standard brokerage account -- it's $2,500 at Fidelity, for example. But some give you a break. Charles Schwab lets you open a custodial account with just $100 (you'd need $1,000 for a standard brokerage account). For more information about our favorite online brokerage firms and their fees and research tools, see our slide show Best of the Online Brokers. Also, see our article Best Ways for Kids to Invest Gift Money for more information.

Keep in mind that if you apply for financial aid for college, the money in the account will be considered to be your assets. The federal financial aid formula expects 20% of the child's assets to be used for college, versus only up to 5.64% of the parents' assets. When you start to earn some income from a job, you can contribute to a Roth IRA, which gives you an extra benefit -- you'll be able to withdraw the earnings tax-free after age 59½, and you can take out your contributions without taxes or penalties at any time. (Money in a Roth IRA is not included in the federal financial aid formulas until it's withdrawn -- see How a Student's IRA Is Counted for Financial Aid.) See Smart Financial Gifts for New Grads for more information about Roth IRAs for kids.

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