Investing in stocks is risk-fraught and it is not for the faint-hearted. Those of you imagining the lure of disproportionate profits who wish to introduce a young child to investing or take the plunge yourself might also have to brace for losing out big time if your bets go haywire.
What is investing?
Investopedia defines investment as an act of committing capital and time to a business, project, real estate, etc. in a bid to make a profit. Simply put, it is ploughing in money in anticipation of future returns.
Since investment involves two scarce and costlier inputs, namely time and money, it should be done judiciously, wisely and with utmost care. So, what is the right age when one can start investing? We set out to explore.
Catching Them Young
Although investing skills can be taught quite early in one’s childhood, taking control of one’s finances and committing to an investment strategy should be done only when one is mature enough. Prior to this financial independence, children can learn some of the essential principles of saving and investing by working in sync with their parents or their trusted guardians or elders to gain experience in investing.
This is called passive investing, wherein parents or elders buy stocks in the name of their wards.
Legally, even minors can own stocks, although they must be bequeathed to them through a will or as a gift. However, trading in stocks can only be done by setting up a ‘Uniform Transfers to Minors Act’ or ‘Uniform Gifts to Minors Act account,’ depending on where you live. The account owner must be an adult, but he or she will be able to manage the assets in the account on behalf of the minor. Once the child is of age, the custodian can be removed from the account.
A guardian account puts the legal ownership and title to any stocks or other assets held in the account to the guardian, whereas in custodial account, this lies with the child. The custodian is merely given the right to make investment decisions on the child’s behalf.
Getting children involved in investing at an early age serves two purposes, one, the money earned through investment secures the future of your kids, and two, it gets children interested in financial planning and investing early on.
A young novice investor would do well to scout around for a no-frills online broker that doesn’t charge outrageous commissions. Look for brokers with no minimum investment, no minimum account balance and no activity fees. That should be sufficient, since most fledgling investor don’t generally have a huge investible surplus.
Eighteen or Twenty-one?
However, to invest on their own, individuals have to achieve the magical age of 18. At least, that is the minimum age stipulated by most brokers for opening an account with them. Some states set the minimum age for holding an investment account above 18 years.
These are the states, which have an ‘over-18-years’ minimum age criteria for investing:
- Alabama, Delaware, Nebraska – 19 years
- Mississippi – 21 years
Why do brokers harp on this minimum age criteria? Eighteen is when a person can enter into a legal contract on his or her own.
Though legally eligible to be an active investor by 18, in order for one to have some investable funds, one may have to graduate, which is when you can land up a proper job and earn a decent income. There is no denying of the fact that students take up odd jobs, but what they earn may be just enough to meet their educational expense and other miscellaneous expenses surrounding their education.
Therefore, twenty-one or twenty-two can be conveniently treated as the right age for actively investing.
Think Before Acting
Investing in stocks should be considered only when one has set his or her financial house in order. If there is something in your life that might put pressure your finances, such as educational expenses or high-interest debt, it is prudent that you prioritize these payments before you think of investing. It’s important to not allow greed to be the overpowering motivation for investing. Don’t always aim to make quick bucks, especially when you are starting out.
Finally, for those who are risk averse or disinterested in managing investments themselves, consider investing in the stock market through mutual funds or exchange traded funds, which diversify the holdings and in turn mitigate risks. Stock investing, meanwhile, requires not only capital, but also the time and patience to pore through financial statements of companies, corporate news releases and other market moving macroeconomic news in making informed investment decisions.