A very common question that I get asked on a daily is “how can I get started investing in stocks?” This could be one of your smartest questions ever asked.
Stocks are one of the most successful medias of investing, with the average annual rate of return for the S&P 500 being 10.31% from 1970-2016. If you had invested $1000 in 1970, you would have $91,261.53 today. Not a bad return. Compared to other investment medias stocks see great growth and are extremely liquid, a necessity for investors. In real estate, some homes stay on the market for months, or even years before they sell. If you are trading well-known stocks with a decent value, they will sell in seconds.
Because of these reasons, many young investors see the value in stocks and want to begin investing as soon as possible. The sooner you begin investing in stocks, the sooner you will be able to achieve your goal of millionaire.
Opening An Account – The UTMA Account
By law, minors are not allowed to open a bank account or manage their own money in an account. Why, this is beyond me, but unfortunately, it is law and there are no workarounds to this issue. This is where the UTMA/UGMA acts come into play.
The Uniform Transfers to Minors Act (UTMA) allows a minor to receive gifts, such as money, without the help of a trustee or guardian. Under this act, an appointed custodian manages the minor’s account until he/she becomes an adult. State-wise, the age varies from 18 to 21 years old. Though the custodian, usually your parent controls the account, the minor (you) own all the assets in the account, can take them out at any time (without tax implications) and monetary gifts given to you are irrevocable. It is important to realize that the account is not tax-deferred, and because you own the assets, could affect your eligibility for financial aid in college. Many banks and investment agencies call these UTMA based accounts ‘Custodial Accounts’
Here are the drawbacks of being a minor. You can’t legally manage the account. Only the custodian can make trades and deposit/withdraw, and there isn’t a workaround to this. However, two things you can do to have more control of the account is:
- Set up a system with the custodian of the account, where when you ask them to trade, they will make the trade.
This system is perhaps the closest (legal) option to having full control of the account. Set up a system where any trade you call goes, as it is your money and account.
- With your custodian’s permission, log in to the account using their credentials. This will give you complete control over everything.
This option lies in a grey area. It is not illegal but is sketchy, and pretty many discounts what the UTMA creates. The UTMA is created so minors will have an account custodian and by managing it yourself is going against the UTMA. If you even think about using this method, get your custodians permission, and make sure that you fully understand the legality of it.
What’s The Best Broker For Me?
Now that you know what type of account the law allows minors to own, it’s time to figure out what the best broker is for your custodial account. Because your parent will probably be the custodian, you will probably be attached to their broker, due to convenience. It is easier to open an investment account with a broker that you already work with, and is worth the simplicity.
If you are starting a new relationship with a new broker, or sticking with one your family/custodian already works with, the normal account specifics (ie. trading fees, anual fees) are the same for custodial accounts. However, more and more brokers are promoting $0 minimum investments. This is great because in the past you needed $1000-$2500 to open an account. Now, you can open an account with any balance, making it more accessible to minors.
If you and your custodian decided to open an account under a new broker, you should look at multiple things before choosing the one to work with. For example, if broker X has a $0 minimum balance to open an account, but has $7 in trading fees, you should keep this in mind. Try to look for the broker who will grow with you, as your investment styles change.
Here are my favorite brokers for young/first time investors:
They have a very low trading fee of $4.95, no minimum account balance and no minimum trade activity. In addition, they offer great online tools and a really easy UI. In addition, the account is very quick and easy to set up.
This is my broker, because my custodian uses this broker. Fidelity is a very professional investment platform with some great tools. In addition, the custodian can grant limited authority on custodial accounts, so you can track your portfolios. However, you cannot trade with this authority.
One of the most common brokers, they are very reliable and have stunning customer service. I used to bank with them.
Also look at Capital One for robo/automatic-investing (this was my first account, I moved due to high trading costs).
RobinHood usually comes up in the quest for a brokerage account because of its impressive specs – free trades and simplicity of use. However, it has multiple drawbacks. 1) It doesn’t offer a custodial account, so you’d have to use method two to open an account. 2) Because it has free trades and makes little to no money, the account is VERY limited and slow. Trades don’t go through in a matter of seconds like in traditional brokerages, they take minutes to hours. You also cant buy a pretty big chunk of investing mediums – Foreign domiciled securities, OTC equities, Options, Preferred Stocks, Tracking Stocks, Mutual Funds, Bonds and fixed income trading, short sales, and Forex. While Robinhood might look like a great idea now, it’s not and as you grow in investing, you will be extremely limited if using this broker. I’d rather pay $3 per trade in any investment I want then get free trades with no options and slow service.
The act of opening the account is relatively simple. You will need to sit down with your custodian, for about 30 minutes to open the account. Depending on if you use the broker already, you will need funding information like your bank’s routing/account number. You will also need your SSN and other identifying info. When you are ready, with the custodian sit down, go to the broker’s website and select open an account. Choose custodial, and follow the instructions given. 10-30 minutes later, you will be the proud owner of an investment brokerage account!
Now, fund the account and get to trading!
Know Your Taxes
While you shouldn’t stress over taxes, it helps to know how they will affect you as an investor. Listed below are the main things you should know about taxation and custodial accounts.
- Anyone can give a monetary gift of up to $14,000 (or $28,000 per couple splitting gifts) to each recipient without incurring federal gift tax. This is an irrevocable gift, so once you receive it, it is completely yours.
- As of 2013, the first $1,000 in investment income is tax exempt, while earnings over $1,000 are subject to tax.
- Due to the Kiddie Tax, investment income above $2,000 may be taxed at the parent’s/custodians tax rates.
- For financial aid purposes, the assets in a UGMA/UTMA account are considered to be the student’s and, therefore, may affect the amount of financial aid the student receives.
- While UTMA is usually used for money and stocks, it can also be used for fine art, real estate, patents and more.
- If the goal of this account is for you to receive a large sum of cash/inheritance, you should do that through a trust, not a custodial account.
Congratulations on opening an account, and good luck with your investments.