On the Legality of Teens Trading Stocks---Cf. Barron's (6/14): ``Here Come the Teens: New Apps Make it a Cinch for Teenagers to Trade Stocks...''

Question

It appears according to an article (`Here Come the Teens: New Apps Make it a Cinch for Teenagers to Trade Stocks. Are They Investing---or Gambling'') which appeared in Barron's this week, minors are able to buy and sell stocks with real money!

Under state laws in the United States, minors are prohibited from opening stock accounts until at least 18 years of age. In fact, all minors, according to a Business Law course I had taken, are prohibited from engaging in business transactions; e.g., if a sixteen year-old bot went to a car dealership and was allowed to ``purchase'' a new car (assuming the dealership ignorantly permitted this), did so, and then went out and wrecked that car---the minor would be entitled to his money back since he had no legal standing to enter into contract for the car in the first place.

The same idea applied to buying and selling stocks; hence, all of the state laws forbidding minors from opening accounts in their own name.

However, according to the Barron's article, children are able to circumvent'' these laws if a parent is willing to open a custodial account (as in years past, which of itself forbids the minor from engaging in any transactions) and then sign some type of a consent form (assuming liability'')---upon which the child can then personally conduct business transactions in the stock market despite the fact that they have not reached the of majority.

Moreover, Fidelity Investments for instance, is vigorously courting such behavior.

QUESTION: WHAT IS THE LEGALITY OF MINORS BUYING STOCKS? It seems to me that this is analogous to the new car'' purchase. WOULD NOT FIDELITY INVESTMENTS, LIKE THE CAR DEALERSHIP, BE LIABLE FOR LOST MONEY SHOULD THE MINOR WRECK'' THE ACCOUNT? (regardless of the waiver a parent might have signed, for---e.g. What parent can legally sign a waiver that say, would permit their minor child to be ``legally served'' in a bar-room? There are many other examples but I think this one suffices.)

Thank you.

Answer 1

Minors can enter contracts

I’m sure you’ve seen school kids riding busses, buying ice cream and going to movies. If they couldn’t enter contracts none of that would be legal since each of those transactions is a contract.

What the actual law is is that contracts cannot be enforced against minors but minors can enforce them against non-minors. Except if the contract is for:

• necessities,
• employment, education, apprenticeship or training.

Some minors contracts are voidable by the minor - meaning they are valid and enforceable unless and until the minor repudiates them. These include contracts:

• for acquiring an interest in property of a permanent nature - like shares,
• with ongoing obligations - like car loans.

Such contracts carry a higher risk for the other party because the minor can walk away at any time, but they are valid contracts. Until they aren’t.

Custodial account

These are not a risk for the brokerage or bank because the adult is the legal owner. The child is a beneficial owner to whom the adult, not the brokerage owes a fiduciary duty.

It’s an open question if allowing the child to transact directly satisfies that fiduciary duty the adult owes. And, secondary, if encouraging that sort of behaviour by the broker might expose them to liability.