With the holidays upon us, we’re getting a lot of questions from folks who want to know how to give stock as a gift to young children.
Buying stock for kids: The gift that keeps giving!
One reader named Jimmy wrote in to Ask Clark with the following question:
“As the holidays approach, I want to buy stock for my niece (5) and nephew (3).
What’s the best way to do this? Should/can I set up an online trading account in their names? Would it be better to set up a self-directed Roth IRA from which to buy stock?
What’s the best way to do this for them and minimize costs?”
Well, right off the bat, you must have earned income to contribute to a Roth IRA. And since most kids who are 5 and 3 don’t have earned income — unless they’re really industrious! — that’s probably out of the question.
So then we arrive at the original poster’s first thought, which was to set up some kind of online trading account.
Opening a custodial account
The thing to do would be to open a custodial account for the child or children in question.
What this means is that you as the mom, dad, grandparent, aunt, uncle or other adult opens the account.
The securities (stocks) held in the account are owned by the child, but the adult has legal responsibility over the account.
When the child turns 18, the assets can be transferred from the custodial account to a regular individual brokerage account.
Where should you open the account?
OK, now we’re down to the nitty-gritty! If you really want the kids to have the best chances of remaining engaged in investing after the initial thrill of your gift wears off, you might want to try Stockpile Inc.
Stockpile is a online discount brokerage firm that makes it easy and engaging for kids to manage their own portfolios. It offers the following benefits:
- 99-cent trades for buying or selling any security or ETF
- No additional fees or minimums
- Ability to buy fractional shares
- Automatic reinvestment of dividends
- You can actually buy gift cards for stock at retail stores!
Setting up a Stockpile account
When you visit the Stockpile website, one of the first things you’ll notice is how clean and visually engaging the site is.
The company offers more than 1,000 individual stocks and exchange-traded funds, the latter of which are like ultra-low cost groups of many different company stocks bundled together.
Setting up a Stockpile account works like pretty much anything else. As part of the registration process, you link a bank account and transfer funds.
When the trading account gets activated, you can buy and sell stock any time you want.
Whatever orders you place will be “batch executed,” meaning they’re grouped together with others and go through at the next day’s market open. That’s a big part of how Stockpile keeps its fees so low.
But here’s something to know: Because of batch execution, the price you buy at may be slightly different than you expect when you’re placing the order the day before. It’s not a big deal; it’s just something to be aware of going into this!
Big pluses: Low fees and fractional shares
Every time you buy or sell a stock, you only pay 99 cents to execute that transaction — regardless of how much or how little you buy of a stock.
There are no other additional fees when doing this online. There is, however, one additional fee if you choose to buy a Stockpile gift card. But more on that in a moment…
For now, let’s get back to the “how little you buy of a stock” part because that’s particularly key here. One of the unique things about Stockpile’s business model is that you can buy what are called “fractional shares.”
Simply put, this means that if one share of a stock of, say, Alphabet (aka Google) trades for somewhere north of $1,000, you can buy just $10 of it and own 0.01 shares.
You don’t have to have $1,000 to get in the game. So the idea of owning fractional shares puts saving and investing that much more in the reach of kids!
We mentioned how visually engaging the Stockpile homepage is. Well, the kid-friendly design aesthetic carries through to the portfolio management side of Stockpile. Here’s a screenshot of a sample portfolio.
Notice how the design of the portfolio page — where your kid can see the stocks he or she owns and how much of them they own — is colorful, vibrant and uncluttered.
This kind of clean user interface goes a long way toward getting kids hooked on investing!
Gift card availability
Another nice feature of Stockpile is that some retail stores like Kmart and OfficeMax will have kiosks where you can buy Stockpile gift cards.
You can pick up a gift card to either open an account for a kid or contribute to an existing account.
The gift cards — typically available in $25 and $50 denominations — are marked with certain company names, but that’s just for marketing purposes.
There’s nothing to stop you from buying $25 of Tesla stock or Microsoft stock or whatever it is with the gift card funds that are on a Disney stock gift card.
The buyer pays a $4.95 transaction fee for each Stockpile gift card. That fee covers the 99-cent buy/sell fee and lets Stockpile make some money to cover the overhead of its retail operation.
Now, you may balk at the idea of paying the $4.95. But the real benefit of picking up a gift card is it gives both you and the recipient something tangible to give and receive around the holidays!
Automatic dividend reinvestment
Finally, Stockpile makes it free, easy and automatic to reinvest dividends when they’re paid out by the companies you’re invested in. (However, not every company pays a dividend.)
But each time you do get a dividend, you’ll get an email that looks like this (see below) letting you know it’s automatically been reinvested back in that particular stock.
So you can keep on adding to your position in a company by buying more fractional shares!