Investing is risk-fraught and it is not for the faint hearted. Those of you, who wish to take a plunge into the stock market for the lure of disproportionate profits might also have to brace for losing out big time if your bets go haywire.
Investing requires time, learning, which can be best done through experience, and self-evaluation of your risk and return predisposition.
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
Though in one of our earlier articles, we presented the idea that investing can be taught quite early into one’s childhood, taking control of one’s finances and zeroing in on an avenue to grow money through investing can be done only when one is mature enough.
Children who are below the age deemed to be the right age for investing on their own, of course can have their tryst with Wall Street, but not without handholding. They can work 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 minor wards.
Legally, even minor children can own stocks, either bequeathed to them through a will or as a gift. However, trading in stocks can be done by the setting up of a ‘Uniform Transfers to Minors Act’ or ‘Uniform Gifts to Minors Act account,’ depending on the state of your domicile. The account owner is an adult, but he is operating the account on behalf of the minor.
Once the child attains the mandatory minimum age, the custodian can be removed from the account and the former now becomes the sole owner of the account.
Children below the eligible minimum age can have something called either the guardian account or custodial account, which allow holding stocks in the name of minor but the account is operated by the minor’s designated guardian, who can either be his/her parent or a legal guardian.
A guardian account vests 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 novice, young investor would do well if he scouts around for a no-frills online broker, which will not charge outrageous commissions. Those brokers having no minimum investment, no minimum account balance and no activity fees could be a better bet, as fledglings aren’t expected to have a huge investable surplus.
Eighteen or Twenty-one?
However, to be on your own, one has to achieve the magical year of 18, which is the penultimate teen year. At least that is the minimum age stipulated by most brokers for opening an account with them. Some states have a mandatory minimum age of 21 for letting someone invest in stocks.
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 legally enter into a contract on his 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 as an option should be considered only when one has set his/her financial house in order. If there is an avenue which is going to pressure your finances, such as educational expenses or high-interest debt, it is only prudent that you prioritize these payments before you think of investing.
Do not allow greed to be the overpowering emotion. Don’t always aim to make quick bucks, especially when you are starting out. Stay invested for long – long enough to fetch you decent returns.
Those who are risk averse can 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.