Top 5 Innovations That Promote Teen Investing
The explosion of teen investors in the stock market is due to 5 amazing market developments in banking and online stock trading. We explore these developments in this article. As a reminder, a minor can’t invest in the stock market or open a bank account without a custodial account set up by a parent or guardian (see article on custodial accounts here).
The 5 gamechangers for teen investors are as follows:
Online Brokers or Services That Attract Teen Investors.
The explosion of online banking;
The reduction or elimination of minimum balances stockbrokers require in a trading account before they can buy and sell stock for you.
The reduction or elimination of fees charged by stockbrokers each time they buy or sell stock on your behalf; and
The ability to buy fractional shares through stockbrokers
Learning how to invest as a teenager has been greatly facilitated by these developments which we discuss further in this article.
Online Brokers or Services That Attract Teen Investors
There are newer online brokers, that offer great investment and banking services for kids through custodial brokerage accounts. Some of these companies have been in existence for just a few years but we are sure they are here to stay.
The difference between the new and traditional online brokers is that the new brokers have designed their apps and/or built their companies specifically to attract:
1) Parents who want to establish custodial accounts to help teach their kids to manage money, and;
2) Young people who want to save and invest.
These companies are spending lots of advertising dollars to market their services to parents and young investors/savers. Here are just a couple of the newer companies that offer custodial brokerage accounts that cater to teens:
Through custodial accounts, these companies make it easy for kids to invest in stocks and for parents to monitor and approve ( or reject) stock purchases their young investors make with their apps.
Some traditional brokers are making strides to capture the young segment of the investor market. For example, Fidelity recently introduced the Fidelity Youth Account “where teens 13 to 17 can learn to spend, save, and invest.” The company even offers a free debit card for teens and no account fees or minimums.
The Explosion of Online Banking
Online banks are a gamechanger for lots of savers. In the past, traditional banks made it difficult for teens to open up a savings or checking account if they had less than a few hundred dollars. In addition, if their bank account balances fell below a certain fixed amount, some of these banks would charge a monthly fee.
With the arrival of online banks (including online banks started by traditional banks), the minimum balance needed to open an account was drastically reduced and, in some cases, eliminated. For example, at the time of this writing, HSBC Direct only requires $1 to open online savings and checking accounts, while Ally Bank has no minimum for either a savings or checking account.
What this means is that teens who don’t have much money with which to open savings and checking accounts can now open these types of accounts without financial stress. Establishing these accounts is necessary for electronically transferring money to online brokers in order to buy financial assets, such as stocks.
Some of the more prominent online banks in addition to Ally Bank and HSBC Direct include Discover Bank, E*Trade Bank, TIAA Bank, and CIBC Bank USA.
Reduction or Elimination of Minimum Trading Account Balances
There was a time when you had to maintain a balance of between $500 and $2,500 in trading accounts with stockbrokers so they can buy and sell stock on your behalf.
Fortunately, these days, many of the major online brokers currently require no minimum balance.
For example, E*Trade, Charles Schwab, Fidelity, Merrill Edge, and many others, all have a no-minimum balance requirement. Overall, things have changed dramatically to the benefit of beginning investors who may not have lots of money to put into the stock market.
Elimination of Trading Costs
Trading costs, too, have come down dramatically in recent times. Just a few years ago, brokers were charging anywhere from $4.95 to $6.95 each time you asked them to make a stock trade on your behalf. However, a major shift has occurred which has resulted in the emergence of no-fee trading accounts.
One company, Robinhood, began offering a brokerage service to help you buy and sell stocks without paying a dime in commission and without a minimum balance – all through a mobile app. This forced many of the major online brokers to eliminate commissions and continue to reduce their minimum balance requirements.
At the time of this writing, major online brokers such as TD Ameritrade, Fidelity, Charles Schwab, E*Trade, Merrill Edge, and others, have made similar moves in order to keep pace with Robinhood and other low-cost online brokers.
New and economical online brokers are good news for teens with smaller amounts of money to invest and I hope, and believe, that basic trading costs will be further reduced or eliminated across all reputable online brokers.
The Introduction of Fractional Shares
Some stocks are so expensive (with some in the hundreds to thousands of dollars per share) that they are out of the reach of an investor with little cash. One solution offered by brokers is to allow investors to buy a fraction of a share. This lets you buy any stock you choose according to your means.
To see the benefit of buying fractional shares, consider what you would do if you wanted to buy the stock of Alphabet, the parent company of Google. The current cost of a share of Alphabet is about $3,000. Chances are that you probably don’t have that kind of loose change in your couch cushion, but you may easily be able to find $30 to invest in Alphabet stock.
This translates to 1% of the $3,000 ($30 = 1% * $3,000) of Alphabet stock. Some newer online brokers that allow the buying and selling of fractional shares include Robinhood, Stockpile, Interactive Brokers, and M1 Finance. However, some of the bigger traditional brokers with an online presence such as Fidelity and Charles Schwab have also entered the fray. I believe that this type of offering to investors increases the accessibility of stocks to teen investors.