Teaching your kids how to invest will set them up for great financial success. By starting them early, they will have a headstart that will pay dividends for life.
The best place to begin is to help your kids buy stocks. The act of buying stocks is a tangible and emotional process. Have you tried discussing diversification and asset allocation to your little one? Good luck. You need to open them up to investing on a level they can understand.
For example, if your kid loves Happy Meals from McDonald’s, buying stock in McDonald’s will be something that they can relate to and connect with on a personal level. It’s something your child will remember for the rest of their lives, and this experience will have a positive impact on their future financial decisions.
Today we will go over how you can buy stocks for your kids, as well as the types of accounts worth considering and the best brokers for children. Let’s begin.
Help your kid pick stocks to buy
The first step of buying your child stocks is to help them choose which stock (or stocks) to invest in. Depending on your child’s age, they may not be ready to learn about complex concepts such as choosing the right investing strategy based on their risk tolerance.
We highly recommend you make buying their first stock a fun experience for them. Don’t concern yourself with the technicals. Let them choose their own stock based on their own reason, even if you disagree with it.
If their first experience with investing is bad, it may be difficult for them to want to return to it in their adult years. However, if their first experience is fun, it will leave a healthy and positive impression.
Start with one or two popular stocks
You don’t have to buy a portfolio of 50 stocks for your child. However, starting with one or two popular stocks they are familiar with is a good place to begin.
Household names like Disney, Apple, Coca-Cola, Amazon, and others are great. If your kid has a favorite company, such as McDonald’s, buy stock in McDonald’s. Not only can you not go wrong with having any of these companies in your child’s portfolio, but your child will be proud knowing they are a part-owner in their favorite company or brand.
Buy fractional shares if you need
Fractional shares are small pieces of whole stocks. Fractional shares allow you to invest in companies like Amazon without doling out thousands of dollars in the process. Many brokers offer fractional shares as an investment option, and you can start investing with as little as $1.
Depending on which stock your little one wants to invest in, fractional shares could be a practical option worth considering. This is especially true for bigger ticket stocks like Amazon and Google.
Consider adding ETFs to your child’s investment portfolio
After your kid has chosen their stock, it may be a good idea to complete their portfolio with some exchange-traded funds (ETFs). ETFs are bought and sold on the stock market, similar to stocks. The difference? Unlike individual stocks, ETFs give you exposure to hundreds of stocks at one time.
For example, buying a single share of the SPY ETF would give your kid’s investment portfolio immediate exposure to 500 (more or less) of the largest companies in America. Another added benefit is that your kid can start collecting dividend payments and reinvesting those dividends into more stocks and ETFs.
Decide on an account type for your kid
The next step to begin stock investing for your kid is to open an investment account for them. You have two primary options when it comes to investment accounts for minors, and one of them can only be used if your child has earned income. Let’s go over both to see which option will be best for your little one.
Custodial brokerage account
A custodial brokerage account is an individual investment account that is controlled by a parent on behalf of a minor. As the parent, you are responsible for investing any money that goes into the account, or using the money for your child’s benefit.
A custodial account can be a great investment account for your kid because any gifts, inheritance, or earnings can be put into the account and invested. For example, if grandma and grandpa want to give your kid money for their birthday, that money can go directly into the custodial brokerage account.
Once your kid reaches a certain age (usually between 18 and 25 depending on your State laws), they will gain full control over the account.
Custodial Roth IRA
If your minor regularly receives earned income, we recommend opening a custodial Roth IRA for them. Unlike other custodial investment accounts, investments inside of Roth IRAs can grow tax-free.
Additionally, contributions (the money that you put in) can be withdrawn at any time without any penalties. It’s worth mentioning that if you make withdrawals on money earned from investments, there will be a penalty.
However, you should avoid making unnecessary withdrawals as much as possible. By leaving your child’s Roth IRA alone, it can grow exponentially over the years with the help of compounding interest.
Choose the best broker for your child
Now that you’ve decided on the type of account to use, it’s time to choose the best broker for your child. You should look for an online broker that has minimal fees and no account balance requirements. This way, your kid can open an account and start investing with as little as $1.
It’s also worth noting that if your kid plans on buying and selliing stocks frequently, you’ll want to open a brokerage account that has low or no trading commissions.
Depending on how your child plans to invest, here are all the factors you should consider:
- Brokerage fees
- Account balance minimums
- Trading commissions
- Stock selection
- Investment selection; access to ETFs, mutual funds, REITs, etc.
Here are the the best brokers for children that we recommend:
Public — Investing made social
Public lets you follow other investors, discover companies to invest in, and invest with any amount of money with fractional shares.
M1 Finance — Build your portfolio in minutes
M1 Finance is a relatively new broker that has a lot of unique tools and features such as fractional shares, Expert Pies (pre-built portfolios), and a clean user-friendly mobile app.
Investing can be seen as boring and outdated for most kids. However, by exposing your children to it early and creating a positive environment around the subject, you can help create a permanent positive impression.
Taking the time now to teach your kid’s how to invest will have a lasting impact on their financial success as they grow up. Regardless of how much money it costs you to fund their investment account, the experience they gain as a result of your commitment is priceless.