A custodial account is an investment or savings account started by an adult and kept safe for a child until they become adults. Starting early with a custodial account gives any investments made more time to mature!
Say someone wants to make a custodial account for a child in their life. This could be for a grandchild, niece, nephew, or just a friend's child. They could create a custodial account with investments that would, hopefully, grow over time. When the child reaches adulthood, that child (now an adult) can either take out and use the money or keep the investment going and allow it more time to grow. The adult managing the account is called the custodian. Before the kid becomes an adult, the custodian can withdraw money from the account, but only to pay for essentials that the kid needs, like school tuition.
Imagine a custodial account is like a dream car. Say you've always wanted a red truck as a kid. Obviously, you have to be a certain age to drive it. A parent, family member, or friend might buy you that truck before you can drive, but it will be waiting for you when you reach the appropriate age. When it becomes your truck, you could sell it or keep it — it is your truck now.
An investment is something you can buy and hold with the hope that it will make you money. Like a seed, it needs time to grow into a tall tree or produce delicious fruit. But like plants, it's no guarantee that things will go as planned. Through diversification, buying a bunch of different things increases your chances of some of those "seeds" doing well, even if others don't.
Think back to our analogy for a custodial account being a truck bought for you. Even though it is in your name, you have to wait till you're old enough before you can drive it. In the meantime, the adult who bought it for you has control of it until you reach the age where you are handed the keys (and the title).
This information is educational, and is not an offer to sell or a solicitation of an offer to buy any security. This information is not a recommendation to buy, hold, or sell an investment or financial product, or take any action. This information is neither individualized nor a research report, and must not serve as the basis for any investment decision. All investments involve risk, including the possible loss of capital. Past performance does not guarantee future results or returns. Before making decisions with legal, tax, or accounting effects, you should consult appropriate professionals.