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 help 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.
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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 to 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 TD Ameritrade and E*Trade.
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.
Understanding the Risks of Stock Investment
While it’s great to introduce your children to the world of stocks and investments, it’s equally important to educate them about the inherent risks involved. Investing in the stock market isn’t a guaranteed way to make money. On some days, you’ll see significant gains, and on others, there may be losses.
Start by discussing the volatility of the stock market. Volatility is the degree of variation of a trading price series over time.
Explain to them that while stocks have the potential for high returns over the long term, they also come with the risk of significant short-term losses. Encourage your child to look at investing as a long-term endeavor, emphasizing the importance of patience and persistence.
Diversification is another important concept to teach. It’s the practice of spreading your investments around so that your exposure to any one type of asset is limited.
This can be beneficial because the positive performance of some investments can offset the negative performance of others. Let them know that by holding a mix of different kinds of investments, they can reduce the risk of a significant loss.
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 if you would like. There are several websites 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 addition 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 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.
The Importance of Financial Literacy
As you embark on this journey of investing with your child, it becomes evident how vital financial literacy is. This doesn’t only pertain to stocks and investments but extends to broader money management practices.
Discuss with your child the concept of saving, budgeting, and understanding the difference between needs and wants. Being financially literate is not just about making money but also about knowing how to manage and save it. Educate them about the power of compound interest and how saving a little bit regularly over time can lead to significant gains in the long run.
Furthermore, introduce them to other investment avenues. While stocks are a popular choice, there are other instruments like bonds, mutual funds, and real estate that also have their merits. This diversified knowledge will not only equip them to make more informed decisions in the future but will also instill a sense of financial discipline from a young age.
Staying Updated With Market News
In the world of stock investments, staying informed is crucial. While it’s not necessary to obsess over every single market fluctuation, it’s beneficial to keep an eye on major economic events, company announcements, or policy changes that might affect stock prices.
Encourage your child to develop the habit of reading financial news. This could be through newspapers, financial news websites, or even dedicated stock market apps. The aim is to get them acquainted with the factors that influence market movements.
Over time, this practice will also enhance their analytical skills, as they’ll start connecting the dots between global events and their impact on stocks.
Moreover, in this digital age, there are several online courses and webinars tailored for young investors. Consider enrolling your child in one of them. This will not only deepen their understanding but also expose them to different investment strategies and philosophies.
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 anymore. You have to call the custodian of the company (a popular one is Computer Share) and see if the stock is 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 out what stock to buy. I’ll keep you posted…
The Bottom Line – How to Buy Stocks for Your Kids
Investing in stocks for your children can be a transformative experience, paving the way for their financial future. As parents, taking that first step to introduce them to the world of finance not only provides them with a head start in wealth accumulation but also equips them with the essential skills of money management.
It’s crucial to strike a balance, teaching them about the potential rewards while ensuring they understand the risks involved. By actively involving them in the decision-making process, discussing investment options, and keeping them informed about market news, you’re nurturing a financially literate future generation.