As a parent, it is natural to want to give your child the best possible start, especially when it comes to money. You want to teach your children good money habits, and them develop good practices that will allow them to succeed financially. In many cases, this is about more than just teaching budgeting 101 and how to avoid credit card debt. Many of us also want to help our children learn the ins and outs of investing.
Buying Stocks for Your Kids
If you want to teach your children about investing, it can be a good idea to buy stocks for them. Minors can't buy stocks, so you will have to do it on their behalf. You have two options when it comes opening an account for your children:
- Guardian Account: You retain ownership of the account, and gains are taxed at your rate.
- Custodial Account: The child owns the count, even though you are in control of it. Gains are taxed at the child's tax rate. Once the child reaches 18 or 21 (depending on where you are), the assets come under his or her control.
You can decide what type of account would work best for your child. If you choose a custodial account, it is important to understand the restrictions that come with managing your child's money until he or she can do it.
Once you have determined what type of account you will open for your child, it's time to set up the investment account. You can usually open a guardian or custodial account at many brokerages, including online brokerages like Scottrade. Find out what minimum requirements come with opening an account, and find out what other information and documentation you might need to open an account on behalf of your child.
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Helping Your Child Choose Stocks
Once you have an account set up, it's time to help your child learn about choosing investments. You can look at companies that your child might be interested in, such as Disney, or Coke. Talk about what makes a good investment, and discuss different options. If your child is a teenager, you can discuss the merits of dividend stocks as well, allowing him or her to begin learning about income investing. You can also look for Direct Purchase Plans offered by some companies, allowing you to save on transaction fees in some cases.
Consider funds as well. There is nothing run introducing a teenager to the concept of index funds and exchange-traded funds. Talk about the costs associated with funds, as well as the instant diversity that might be available in some cases.
Your child can go on a practice run, it you would like. There are several web sites and smartphone apps that allow you to put together a hypothetical portfolio and track its performance. If you want, you can encourage your child to track investments he or she is interested in, just to get an idea of how they are doing. Read up on the companies of interest and encourage your child to consider various fundamental factors in additional to the technical aspects of how stock prices rise and fall.
Once your child is more confident, you can begin making stock purchases on behalf of your child. Letting him or see that sometimes there are losses as a result of a poor decision can be part of the learning process, but your involvement should help prevent major investing mistakes.
Note from me……
Buy Stock Through the Company
When we had our first son I was excited to buy some stock for him in a custodial account directly with my brokerage firm. I bought him one share of Nike and one of Under Armour and was able to request the certificate to be mailed to me. I was getting ready to do that again for our second son, but learned that our firm (and many others) don't do this any more. You have to call the custodian of the company (a popular one is Computer Share) and see if the stock available.
Wanting to buy some different stock (I was looking at Google or Apple) I was able to get their contact info from my back office. I was disappointed that my first pick, Apple, no longer issues stock certificates – boo! So if you're an Apple fan like myself and want to get the certificate for a loved one, you're outta luck. I know. I'm saddened, too. 🙁
I'm still trying to figure what stock to buy. I'll keep you posted…..