Investing for Teens and Young Adults

As teens grow toward independence, it’s important to provide a good foundation for saving and money management, especially when they’re exposed to social media content covering money hacks, cryptocurrency and meme stocks.

Learning about investing as part of a long-term financial strategy may help put your teen on a path to financial success in the future.

Getting Started: Teach Teens About Saving vs. Investing

As you’re teaching your teens about money, it’s important to explain the difference between saving and investing.

Saving means putting aside money they’ll need soon. Bank savings accounts (which are available to minors) are generally used for short-term expenses, not long-term goals. These accounts give your teen easier access to their money. But they don’t have much potential to grow and generally cannot beat inflation over time.

Investing involves participating in the growth of a company or other entity. You buy and hold assets for a long time frame to seek an increase in value. Stocks, bonds, mutual funds and exchange-traded funds (ETFs) are commonly used investment vehicles. Teens cannot invest on their own, but they can own these assets in a custodial account, where an adult controls access to the money.

Other than investing for college, your teen may not have given much thought to investing for retirement or future purchases such as a home. Explain that those who start investing early have long time horizons. That means that time is on their side because they won’t need the money for years or even decades.

Additionally, make sure your teen understands that investments can also lose value. However, over the long term, a well-diversified investment portfolio (meaning a set of investments that includes multiple types of assets) has the potential to increase in value.

Understanding Investment Types

Next, you may want to discuss a few different ways to invest.

Stocks

A stock is partial ownership in a company. Companies sell shares of stock to investors as a way to raise money.

Investors (also called shareholders) may trade with each other, buying and selling shares of the companies they own. If most investors think a company will do well in the future, they’ll probably buy more shares, and the price of the shares will increase. If most investors think a company will do poorly, they’ll likely sell shares, causing share prices to fall.

Keep in mind that the stock price matters only when you buy or sell. But selling stock isn’t the only way to make money from your investment. Some companies pay dividends, meaning they distribute some of the profits to shareholders, generally four times a year. You might describe it as a quarterly allowance the company pays to shareholders.

Bonds

A bond is technically a loan to the bond issuer that must be repaid to the investor eventually. Bonds can be issued by governments, states, counties, cities, school districts, churches or other organizations.

Depending on how stable the issuer is, bonds can potentially seem like safer investments than stocks. Most younger investors don’t invest heavily in bonds because their investments usually are long term and have more time to absorb the normal ups and downs of the market. But as an investor gets closer to retirement, more of his or her portfolio is likely to shift toward bonds, since they’re a more conservative choice than many other investments.

Mutual Funds

Rather than representing one company or security (like stocks and bonds), mutual funds include a group of investments from multiple companies or issuers. This gives investors access to a more varied portfolio.

A mutual fund is run by a professional manager and staff. This team of professionals can pick stocks or bonds they believe will perform the best based on certain criteria such as high earnings or growth potential. The team also decides when to buy or sell within the mutual fund portfolio to keep it performing well.

Exchange-Traded Funds (ETFs)

ETFs have become a popular alternative to mutual funds. They’re similar to conventional mutual funds in that both represent an investment in a collection of securities. The primary difference is how they are bought and sold. ETFs are traded on an exchange throughout the day, like stocks. Mutual fund prices are calculated once a day after the close of the market.

Can Teens Open an Investment Account?

Minors cannot own investment accounts outright, but you can open a custodial account on the minor’s behalf.

529 Education Savings Plan

A 529 plan is a state-sponsored education account that allows you to contribute toward education goals. The account owner controls the account on behalf of a beneficiary. This account offers tax savings, with tax-deferred earnings and tax-free withdrawals for qualified education expenses. You can use the money for K-12 private school tuition, accredited 2- and 4-year colleges, apprenticeships, and vocational, technical and graduate schools.

Coverdell Education Savings Account (CESA)

A CESA is a federally sponsored custodial account that is used for education. The account offers tax savings, with tax-deferred earnings and tax-free withdrawals for qualified education expenses. You can use the CESA assets for K-12 private school tuition, accredited 2- and 4-year colleges, and vocational, technical and graduate schools.

Uniform Transfers to Minors Act (UTMA)

UTMA accounts allow adults to transfer assets to a minor to be used for any purpose. They’re often considered more flexible than other custodial account types because the money doesn’t have to be used for education.

Minor IRA

IRAs were specifically designed as a tax-advantaged way to save for retirement, but the IRS allows special purpose withdrawals  under specific conditions (examples: first home, higher education) that are penalty-free. Teens can contribute to an IRA if they have earned income. A parent or guardian manages the account as a custodian or responsible individual.

Does My Teenager Have to File a Tax Return?

Maybe. If their earned income (money from a job or a business) was more than $15,000 for 2025 or their unearned income (money from investments) was more than $1,100 in one calendar year, then the IRS requires them to file a tax return , even though you claim them as a dependent on your tax return.

Even if your teen earned less than those amounts, they can still file a tax return. It might be beneficial for them to do so. For example, if they had federal income taxes withheld from their pay, the IRS recommends that they file a tax return  to get some, or perhaps even all, of that withholding back.

Managing Expectations When Investing for Teens

Helping your teen understand the basics of investing now prepares him or her for the future.

As a final reminder, all investors should bear in mind that past performance doesn’t guarantee future performance. That includes teenagers!