Must read: Our guide to investing in bonds
Investing for teens
It’s never too early to start investing. Here’s how with these investing strategies for teens.
Got some excess cash lying around thanks to a summer job or perhaps a generous relative? Or maybe you’re a parent hoping to introduce your child to the benefits of investing?
It’s easy to start investing for teens, so keep reading to find out how to put your money to work and create a more secure financial future.
How old do you need to be to invest?
You need to be at least the age of majority in your province or territory (either 18 or 19 years old) to open your own investing account. So if you’re aged 13-17 (or possibly 18 in some places), you can’t open a brokerage account to trade stocks, ETFs and other assets.
But don’t let that put you off—you can still start investing as a minor. A parent or guardian can open an investing account on behalf of their teenager, but there are a couple of different ways to go about this.
How to invest for teens
There are two ways to start investing as a teenager:
1. Invest through a brokerage account
The first option is for a parent, guardian or grandparent to open an informal or formal trust brokerage account.
An informal trust (also called an in-trust-for account) is the simplest option, and it allows the adult to manage investments on behalf of their teen until they reach the age of majority. A formal trust is more complicated but may be needed if you have a large sum to invest. ]
You’ll need legal assistance to create a trust deed if you choose this option. There are also tax implications to consider, as the parent will need to pay tax on any investment income earned in the account.
Once the brokerage account has been set up and funded, you can use it to invest in stocks, ETFs, mutual funds, bonds and more for your teenager.
Online brokerage accounts that offer informal or formal trusts:
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2. Invest in a registered account
The second option is to invest through a registered account like an RESP or RRSP:
Registered Education Savings Plans (RESPs)
Parents, guardians, grandparents, other relatives and friends can all open RESPs for minors, so this is an option well worth considering if you want to invest for your teen’s education.
You can contribute up to $50,000 per beneficiary over the lifetime of the RESP, while federal and provincial government benefits can provide a further boost. You can invest in stocks, ETFs, bonds and more in an RESP, and the investment income you earn isn’t taxed until you withdraw it.
Registered Retirement Savings Plans (RRSPs)
Parents can open RRSPs for their children. Or, children can open RRSPs for themselves with their parents’ consent. However, the teen will need to earn income in order to earn contribution room, and contribution limits apply.
You can hold a wide range of investments in an RRSP, including cash, stocks and mutual funds. Your teen can use the account to fund their retirement, or they can make an early withdrawal to pay for their education (under the Lifelong Learning Plan) or their first home (under the Home Buyers’ Plan).
Tax-free savings accounts (TFSAs)
A TFSA is another type of registered account that offers tax benefits and can be used to hold a wide range of investment types. But you’ll need to be at least 18 or 19 years of age to open a TFSA, so it’s not an option for many teens.
Benefits of investing for teens
Why should you start investing as a teenager? There are lots of reasons:
- Time is your friend. When you invest as a teenager, you can set your sights on long-term financial goals. This means you can ride out short-term volatility and benefit from capital growth over time as well as ongoing investment income such as dividends.
- Compounding. The power of compounding has a huge impact on your ability to grow wealth. The so-called “snowball effect” of earning interest on your interest makes a massive difference to the size of your nest egg over time—check out the example below for an idea of just how big the difference can be.
- Make the most of your income. The older you get, the more expenses you have. There are mouths to feed, bills to pay, and a whole lot of other expenses you simply don’t have to worry about as a teen. So if you have a part-time job, you can put a larger percentage of your income towards investments.
- Set yourself up for life. Start early, and you can potentially build lifelong wealth. Major expenses like buying a car, buying a house and funding your retirement will become a lot easier to manage if you make wise investing decisions early in life.
Example: Why you should start investing early
To demonstrate just how powerful the impact of compounding can be, let’s look at the difference between starting to invest at the age of 15 or 30.
Let’s say you start with an initial investment of $1,000, then invest an extra $100 each month. We’ll also assume that your investments return 9.38%, which is the 10-year annualized return of the S&P/TSX Composite Index of Canadian stocks.
If you started investing at 15, you would accumulate over $600,000 more than if you started at age 30.
| 15-year-old | 30-year-old | |
|---|---|---|
| Initial investment | $1,000 | $1,000 |
| Monthly investment | $100 | $100 |
| Annual return | 9.38% | 9.38% |
| Balance at age 30 | $41,959.86 | $1,000 |
| Balance at age 40 | $122,347.96 | $21,947.06 |
| Balance at age 50 | $319.395.47 | $73,292.53 |
| Balance at age 60 | $802,398.82 | $199,150.69 |
| Difference at age 60 | $603,248.13 more |
* For the purposes of this example, returns are compounded annually, and regular contributions are made at the beginning of each month.
Why should I invest instead of save?
Why consider investing when you could grow your money in a savings account? The answer is simple: investing offers the potential for higher returns.
Take the 10-year annualized return of the S&P/TSX Composite Index: 9.38%. Even during the interest rate highs of recent years, when the Bank of Canada’s benchmark rate reached 5%, savings account rates never got close to the 9%+ returns of the stock market. And while past performance is no guarantee of future performance, the potential for bigger returns from investing vs saving is plain to see.
But that doesn’t mean you should put every last dollar into investments—far from it. A high-interest savings account offers a steady rate of return with next to no risk. It also offers easy access to your money when needed, like if you need to cover an emergency expense or if you have a short-term financial goal such as buying a car.
It’s all about finding the right balance based on your personal financial situation.
What are the best types of investments for teenagers?
The best type of investment for you depends on what you want to achieve.
What’s your investing goal? How long do you have to reach it? Are you willing to take on more risk to potentially get a higher return, or would you rather stick with a safe, low-risk option?
Answering these questions will help you work out where and how to invest your money.
That said, let’s take a closer look at some of the best types of investments for teenagers. Check out the pros and cons of each to work out which of them is right for you.
Stocks
The stock market is the first place many people think of when they’re ready to start investing. When you buy a company’s stock, you can potentially make money in 2 ways:
- If the price of the stock increases, you sell it for a profit.
- If the stock pays a dividend, a company distributes a portion of its profits to shareholders (please note that not all stocks pay dividends).
It’s easy to buy and sell stocks using an online brokerage account. Many brokers also provide access to US stocks, and some offer the opportunity to invest in stocks from countries all over the world.
Pros
- Fractional shares mean you don’t need a lot of money to start investing
- Potential for higher returns than low-risk investments
- Ongoing passive income from dividends
- Some brokers don’t charge trading fees
Cons
- You could lose money
- Picking individual stocks is time-consuming
- Brokerage fees could add up if you invest in multiple stocks
ETFs
ETFs (exchange-traded funds) are definitely worth a look if you’re a novice investor. An ETF is an investment fund that holds a portfolio of assets, including stocks, bonds, commodities and more. So when you buy a unit of an ETF, you don’t just invest in a single company—you gain exposure to a diversified basket of assets.
This makes ETFs a great starting point for many investors. They can be easily traded on an exchange just like stocks, and you don’t need a big bank balance to get started.
The most popular ETFs are designed to replicate the performance of major market indexes. For example, 2 of the largest ETFs in Canada are the Vanguard S&P 500 Index ETF and the iShares Core S&P/TSX Capped Composite Index ETF.
But there are also ETFs that focus on a wide range of themes, from mining to robotics, and actively managed ETFs that aim to outperform the market. Read our full guide to ETFs to find out more.
Pros
- Quick and easy access to a diversified portfolio
- Low-cost investing option
- Huge range of funds to choose from
- Can be passively or actively managed
Cons
- Management fees apply
- You don’t control what investments the fund holds
- Brokerage fees may apply
Mutual funds
Mutual funds are managed investment funds that, like ETFs, invest in a basket of assets. So when you buy units in a mutual fund, you gain exposure to a diversified portfolio.
Mutual funds are more likely to be actively managed than ETFs, but there are also passive mutual funds designed to track the performance of stock market indexes. There’s also a huge variety of funds to choose from based on your investing goals.
Unlike ETFs, which are bought and sold on stock exchanges during trading hours, mutual fund buy and sell orders are filled at the end of the trading day.
Pros
- Professionally managed
- Easy access to a diversified portfolio
- Huge range of funds available
- Quick and easy to buy and sell
Cons
- Generally, higher management fees than ETFs
- You don’t control what investments the fund holds
- Brokerage fees may apply
- Some have a high minimum investment requirement
Bonds
Bonds are fixed-income investments that can provide steady returns with a low level of risk. When you purchase a bond, you lend money to a government or company for a set period of time. In return, you receive interest payments, usually at a fixed rate, and you get your initial investment back once the bond reaches maturity.
Bonds are worth checking out if you want a low-risk way to generate a steady income. There are also bond ETFs and mutual funds available that provide easy access to this asset class.
Pros
- Low-risk investment
- Reliable source of income
- Can be an important part of a diversified portfolio
Cons
- Lower returns than other types of investments
- May not keep pace with inflation
- Corporate bonds come with a higher level of risk
GICs
With a guaranteed investment certificate, you deposit your money for a fixed term of anywhere from 1 month to 10 years. In return, you earn interest on the money you deposit, and you then get your money back at the end of the term.
GICs are another option worth considering if you’re risk-averse. They’re safe, provide steady returns and are covered by deposit insurance, but you can potentially get higher returns from other types of investments.
Pros
- Low-risk investment
- No fees to worry about
- Covered by CDIC insurance
- Low minimum investment
Cons
- Most GICs are difficult to cash out early
- Lower returns than other types of investments
- May not keep pace with inflation
Should teens invest in crypto?
It really depends on your appetite for risk.
The main thing you need to understand about crypto investing is that it’s very risky. Cryptocurrencies are highly volatile, not as tightly regulated as many other investments, and a common target for scammers. You could lose some or even all of your money. You also don’t get the protection of safeguards like the Canadian Investor Protection Fund (CIPF), which offers cover if you invest in stocks through an investment firm that goes broke.
That said, crypto can provide the potential for higher returns than other, safer investments. You only need to look at a historical price chart of Bitcoin over the past decade to know that’s true.
But with the chance of big returns also comes the risk of big losses, so make sure you know exactly what you’re getting into before investing in crypto.
Robo-advisors for teenagers
A robo-advisor is an automated investment platform that makes investments on behalf of account holders using predetermined algorithms. Essentially, a robo-advisor is the robotic equivalent of a human financial advisor.
To use one, you must open and fund your account and answer a questionnaire about your investment goals and risk tolerance. Based on your responses, the robo-advisor will choose how to invest your money from a range of pre-built portfolios featuring ETFs, stocks, bonds and other assets.
Robo-advising platforms typically let clients hold investments in a number of different accounts that parents can open for (or with) their children, including RRSPs, RESPs and non-registered brokerage accounts.
Robo-advisors are worth checking out if you want a quick and easy way to access a diversified portfolio of assets, and if you’re happy to take a hands-off approach to investing. But you will also need to pay management fees, and some people might prefer to have more control over their investments.
Dive deeper: Compare robo-advisors
Risks of investing
All investments come with some level of risk. Here are some common traps and issues to watch out for:
- Losses. There is no guarantee that your investments will deliver the returns you want. In many cases, there is also a risk that you could lose money.
- Higher rewards come with higher risk. Investments like stocks come with the potential for attractive returns, but they also come with a higher level of risk.
- Complex. Investing doesn’t have to be rocket science, but it is complicated and confusing at first. You’ll need to make sure you understand what you’re investing in before handing over any money.
- Fees. While trading commissions are lower than they once were (and sometimes even $0), watch out for any brokerage or account fees that apply.
- You may not be able to access your money in an emergency. If you’re hit with an unexpected bill, you may not be able to sell your investments for cash straight away, or you may be forced to sell them at a loss. Make sure to leave some cash aside in a high-interest savings account so you have an emergency fund to call on when needed.
How to minimize your risk
Reduce the risks of investing with these simple tips:
- Keep it simple. You don’t need to overcomplicate things, so leave complicated investments like options to experienced traders. An index fund ETF that tracks a major market index like the S&P/TSX Composite Index or the S&P 500 is a simple, low-cost starting point.
- Think long-term. Don’t let short-term market movements motivate you to panic-sell. Markets fluctuate all the time but historically have increased over the long-term, so keep your overall goal in mind and be prepared to ride out any dips.
- Diversify. Investing in a diversified portfolio of assets spreads your risk around. Choosing a mix of different types of investments, including safe choices as well as some with more risk attached, can help minimize the effects of volatility.
- Set up a recurring investment. Instead of worrying about trying to time the market, consider investing a fixed amount each month. This helps to reduce risk and limits the impact of market volatility.
How to choose a brokerage account for a teen investor
Choosing a trading platform can be daunting at first. To make the decision easier, ask these 5 simple questions when comparing brokers.
1. What can you invest in?
The best brokerage account for a teen investor will provide access to all the assets you want to trade. You may be starting out by investing in US and Canadian stocks and ETFs, in which case you’ll be well served by many platforms.
But if you want access to a wider variety of foreign markets, or if you might one day plan to explore more advanced investments like futures and options, search for a platform that supports everything you want to trade.
2. How much does it cost?
It’s typically free to open a brokerage account, but there are other costs to watch out for.
The most important of these is the brokerage fee, which is charged each time you place a buy or sell trade. However, some Canadian brokers now offer commission-free stock trading.
Some brokers will also charge an annual or quarterly account maintenance fee if you don’t meet a minimum investment requirement, but many platforms do not charge this fee.
Other charges to keep an eye out for include:
- Real-time market data fees
- Subscription fees for news and analysis from third-party providers
- Inactivity fees
- Currency conversion fees if you trade on foreign markets
3. How easy is it to use?
The online trading platform you choose should be simple and straightforward to use. Check online tutorials and read reviews from other users to get an idea of how quickly and easily you can start trading.
Any teenager will also tell you that a user-friendly mobile app is an absolute must. Read reviews on the App Store or Google Play to ensure that it offers a streamlined trading experience.
4. What research and analysis tools does it offer?
Look into the tools and resources the broker offers to help you choose investments and monitor the market. These could include:
- Stock and ETF screeners to help you filter investments based on key criteria.
- Customizable watchlists and alerts.
- Analyst ratings and research
- Charting tools
- Market news
Of course, be sure to double-check whether any of these features come with fees.
5. How can you contact customer support?
Finally, check how you can access customer support when you need—phone, email and/or live chat. Is support available during Canadian trading hours only, or are there extended customer service hours?
How to start investing as a teenager
Ready to start investing? Here’s what you need to do.
Step 1: Set a goal
Sit down with your parents—or parents, pull up a chair next to your child—to talk about financial goals. Is the plan to build wealth for the future, save for a car or other big purchase, or reach some other goal?
Time horizon, risk tolerance and end goal will all impact the types of investments you choose.
Step 2: Open an investment account
The parent or guardian will now need to open a trust account so they can invest on the teenager’s behalf. If they already have an account with an online broker, they’ll need to log in to their trading account to get started. If not, they’ll need to go through the process of providing their personal information and contact details to open a new account.
You’ll need to provide proof of ID for the trustee (parent) and beneficiary (teenager) on the account. And if you’re setting up a formal rather than informal trust, you’ll need a copy of the trust agreement along with additional documentation.
Step 3: Research investments
Research stocks, ETFs and other investment types before deciding where to invest your money. Make sure the investment you choose aligns with your financial goals and time frame.
Step 4: Start investing
Log in to the trading account and search for the investment you want to buy. You can place a market order to buy at the current available price, or set a limit order that will automatically execute when the price you want becomes available.
Learn more about investing
There are plenty of ways to learn more about investing. With more knowledge, the better equipped you are to make smart investments and minimize potential losses. Any of the following resources are a solid place to start:
- Stock trading books. There are lots of helpful books on investing that can start building your knowledge, including How to Make Money in Stocks by William J. O’Neil and Market Wizards by Jack D. Schwager.
- Stock trading channels. If reading isn’t your thing, try YouTube. Content creators upload video tutorials covering investment basics—just make sure they’re a legit, trusted source, as some YouTubers make promises that sound far too good to be true.
- Stock trading games. Stock market games help you hone your trading instincts with simulated markets and trading goals. Popular games include Wall Street Survivor, HowTheMarketWorks and the Young Money Stock Market Game.
- Demo accounts (also called paper trading). Test-driving your investing skills with a paper trading account is arguably the closest you can get to real trading without risking a penny. This type of account lets you play with virtual money on a hypothetical market that mirrors live market pricing, so you can test out investing strategies before putting them into action.
Bottom line
The world of investments is exciting—but it isn’t without risk. Ultimately, the best investment strategy depends on your goals. No matter what type of investing you’d like to try, as a teenager, you will need your parents to begin investing if you’re under the age of majority. Check out our guide on how to start investing in the stock market to learn more.
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