As a parent, you may encourage your teenager to buy stocks and develop critical money management skills. As a teenager, you may already be motivated to take advantage of compound growth at a young age. Teenagers, however, have not reached the adult age of consent to open individual brokerage accounts. A teenager must therefore buy stocks through the Uniform Gifts to Minors (UGMA) and Uniform Transfer to Minors (UTMA) acts.
Adult custodians set up UGMA-UTMA brokerage accounts on behalf of minors. The teenager will fully control the money once he reaches the age of majority, at either 18 or 21. The distinction between a UGMA and UTMA account varies according to state law.
For a teenager to fund the UGMA-UTMA, he would give money to his adult custodian, who would then place money into the account. Although the UGMA-UTMA is managed by an adult custodian, the teenager owns all funds within the account. Therefore, any withdrawn balances must be spent for the teenager’s benefit.
The adult custodian executes trades on behalf of the teenager within the UGMA-UTMA. Teenagers cannot act alone to execute trading decisions within the custodial account. As a teenager looking to trade stock, you would therefore need to provide exact instructions for your adult custodian to buy or sell shares. The custodian, however, does not necessarily need permission from a teenager to coordinate trades within the custodial account.
A dividend reinvestment plan (DRIP) is a good way for a teenager to get started with stocks. Larger corporations offer DRIP plans that allow you to buy shares directly within the corporation and bypass expensive brokerage commissions. Most DRIP plans accept investments of as little as $50 per month to buy stock. Cash dividends can also be reinvested back into the plan to buy additional shares. To fund the UGMA-UTMA DRIP, the adult custodian would agree to regular bank drafts and send checks to the plan administrator on behalf of the minor. Corporations provide enrollment materials for DRIP plans through their investor relations department.
Through a DRIP, a teenager can pridefully invest money within his favorite company. For example, an athlete and sports fan may excitedly enter the Nike DRIP.
A teenager who learns about the stock market early is better poised to take advantage of compound growth and avoid financial difficulties later in life. In fact, a $100 monthly investment that earns a 10 percent annual return grows to $1.7 million over 50 years.
The UGMA-UTMA allows adults to put money aside on behalf of the youngster without the legal fees associated with complicated trusts. Relatives often put money into these custodial accounts to help pay for college expenses.
The UGMA-UTMA account balance goes directly to the teenager once he reaches the age of majority. At that point he may withdraw and spend the money at his discretion. Relatives who deposited money into the account as a tuition gift may be disappointed if the young adult decides against college. Gifts made into the UGMA-UTMA are irrevocable.