How to Buy Stocks Under the Age of 21

How to Buy Stocks Under the Age of 21
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In most states, you become a legal adult at age 18. Once you're a legal adult, the process of buying stock is the same whether you're 19 or 69. However, the strategies you use to invest may be different. If you're still under the age of majority, though, you will probably need to get your parents involved to buy stocks.

Opening and Funding an Account

The first step in buying stock is to open an account and put money in it. Many investment houses will let you open an account by filling in a form on their website. You can fund it by mailing in a check, dropping a check or other form of money off at their offices or by transferring money into the account electronically. If you're a minor, you will have to have your parents open a custodial account for you. This account is legally under your parent's control, but the money in it is yours, and your parents can't take money out for their own purposes. Plus, when you reach the age of majority in your state, your parents get taken off of the account.

Age and Risk

When you're choosing the investments you buy, think about your time frame. If you're investing for the long term, you have the ability to take more risk. Risky investments aren't ones in which you're guaranteed to lose your money -- those are bad investments. They're investments whose values and return fluctuate, meaning that you could end up in a good or bad position at any given time. Over time, though, the bumps in a risky investment even out, and you stand to make more money than you would with less risky investments. If you're investing for retirement, you might have a 50- or 60-year horizon, so you may be able to afford to take lots of risk. Saving for college or for a house purchase, though, means that you'll need the money more quickly and that you could take less risk.

"Kiddie" Tax Considerations

Young investors can find themselves exposed to the Internal Revenue Service's "kiddie" tax. Since minors usually make less money than their parents, the IRS set up special tax rules to prevent parents from shifting investments to their kids to avoid taxes. If you aren't married, have at least one surviving parent and make more than $2,000 from interest, dividends or capital gains tax, you could have to pay tax at your parent's rate for any investment income you earn over that threshold. The $2,000 threshold applies for the 2013 tax year, but can vary every year. You only have to worry about the kiddie tax if you're under 19 or if you're a college student that is under 24 years old.

Investing with Low Balances

Many younger investors start out with relatively low balances -- frequently investing a few thousand, rather than a few million, dollars. When you don't have a lot of money to invest, it can be hard to properly diversify your money if you choose individual stocks. With this in mind, investing in mutual funds, which are pre-built diversified portfolios, can be a way to give you exposure to a larger list of companies without the inconvenience and cost of holding multiple small positions.