Everything You Need to Know About Kids Stock

April 16, 2021
financial literacy

Few things bring greater joy than helping someone to reach their biggest goals, especially when that someone is a child in your life.

Saving for the children in your life from a young age is one of the best ways to make a meaningful investment in their future. Yet recent studies show that fewer than half of families have money saved for their kid’s future.

But it’s never too late to get started.

Buying stocks for the children you love allows you to invest in their future today and watch that money grow exponentially throughout their childhood.

In this article, you’ll learn the basics of kid’s stock and the best way to start investing for kids.

Why Buy Stocks for Kids?

Before we dive into how to buy stocks for kids, we should first talk about why it’s a good idea. After all, once you see the value of investing for the children in your life, you’ll be even more excited to get started.

There’s no doubt that life is expensive. And children are bound to face many large expenses in their early adult years, whether it be buying a home, heading off to college, starting a business, planning a wedding, or some other grand adventure.

By investing for them from a young age, you can start preparing them for these huge expenses. 

Because of their young age, you can also take advantage of the long time horizon, giving your investments time to grow and compound.

Investing for kids has far more benefits besides just building a nest egg for their future. When you buy stocks and other investments for the children in your life, you can involve them in the process. 

Having a hands-on role in their investments will help them become more financially literate and start their adult lives with knowledge of how money and the stock market work.

As they watch their money grow, they can dream of all the things they can use it for. 

They’ll have a true sense of ownership over the funds in a way they might not if you quietly invested for them without inviting them to join in the conversation.

Can Kids Invest in Stocks?

Buying stocks for kids is a bit different from buying stocks as an adult. If you wanted to buy stock for yourself, you’d be able to log into your online brokerage account or contact your personal broker.

Minors under the age of 18 (and under the age of 21 in some states) can’t open traditional brokerage accounts. But that doesn’t mean investing is completely off the table.

Though they can’t open a traditional brokerage account, children can own stocks and other securities. There are alternative types of brokerage accounts specifically designed for parents and other loved ones to start investing for the children in their lives.

How to Buy Stocks for Kids

The first step to buying stock, whether for yourself or for a child, is to open an investment account. As we mentioned earlier, children can’t open traditional brokerage accounts. But there are accounts specifically designed to invest for a child’s future.

What is a custodial account?

A custodial account is a type of brokerage account that an adult opens for a minor. 

The adult, known as the custodian, can contribute money to the account throughout the child’s young life and invite other loved ones to contribute as well.

Once the child reaches adulthood, they receive control of the account and any assets within. Children can use money in their custodial account to purchase a home, pay for college, travel the world, or reach any other financial goal.

Custodial accounts offer total flexibility. They have flexible investment options, meaning the custodian can easily invest in assets to help create a sizable nest egg for a child’s future. 

Plus, they provide flexibility to the child so they can spend the money to fund any financial goal once they reach adulthood. 

In short, they grant your loved ones total financial freedom when they come of age to take over the account.

Custodial accounts with EarlyBird

EarlyBird is a simple and innovative solution that’s transforming financial gifting. It allows families to open custodial accounts and collectively invest in a child’s future.

When you open an EarlyBird account, you can start investing money for a child in your life. You can also invite friends and family to join. The EarlyBird app makes it easy for other loved ones to contribute to a child’s custodial account.

Custodial account alternatives

Custodial accounts aren’t the only way for families to buy stocks for kids and invest in a child’s future. A couple of other popular options include:

  • A 529 college savings plan is an investment tool used to help save money for educational expenses. 
  • A custodial IRA allows families to start investing for a child’s retirement. Families can open either a traditional IRA or Roth IRA for a child.

Both 529 plans and custodial IRAs allow families to start investing for a child, but both have some considerable downsides. A 529 plan is specifically designed to cover education expenses, and an IRA is designed for retirement savings.

Both accounts come with tax advantages, but you only get those tax advantages when you use the money in the account for its very specific purpose. Unfortunately, this prevents children from using their savings to fund other goals.

When to Start Investing for Kids

Loved ones considering buying stocks for a child might be wondering when the best time is to get started. The simple answer is: as soon as possible.

The younger a child is, the longer the time horizon for your investment (time period from when you start investing until the money is withdrawn for use.) This has two significant benefits.

First, it means your risk tolerance can be much higher. After all, if you have a 20-year time horizon, you don’t need to worry about a short-term stock market crash — you can easily ride it out and reap all the benefits of the upswing when the marketer recovers (which it always does, eventually). 

This means you can put more of your money into stocks (which tend to be riskier but have higher rewards) instead of something safer, like bonds. 

The second reason a long time horizon is great is because of compound interest.

When you invest in the stock market, your money benefits from compound interest. In other words, your money makes money. Then, the money you earned also makes money. The larger your investment account grows, the faster your money compounds.

Suppose you saved $100 per month for a child in a bank account. The money accrues little to no interest — the national average interest rate for savings accounts is only 0.07%!
So, any money put in the account only grows when you contribute more money. If you started saving as soon as the child was born, the account would have $21,600 when the child turns 18.

But what if you’d invested that money in the stock market instead? 

According to the Securities and Exchange Commission, the stock market has an average annual return of 10%. So, if you invested that same $100 per month in stocks, thanks to compound interest, the account would have about $55,275 by the time the child turns 18.

You’ve more than doubled your money without having to increase the amount you save. Compound interest took care of it for you.

Of course, it’s never too late to start investing for a child. Even just a few years of compound interest growth is better than nothing. 

As the old saying goes, the best time to start investing is when a child is born, but the second-best time is now.

Best Kids Stock to Buy

Here are four steps to help you figure out the best stock to buy for kids:

Identify your investing goals

The very first step before you start buying stock should be to identify your investing goals. 

When you start investing for a child, your goal is likely to help financially contribute to their future goals, whether it be going off to college, buying a home, or anything else.

When you set specific financial goals, it’s easier to craft your investing plan — even if it’s something generic like wanting the investment to be worth $50,000 by the time they’re 18. 

With a set goal, you’ll have a better idea of how much you ultimately want to save for the child. Using that number, you can figure out how much you should contribute each month to get there.

Decide on what type of investments to buy

When we talk about buying stock, most people envision buying stock in a particular company. And while that’s one way to do it, it may not be the most effective route. We recommend ETFs.

An ETF, short for exchange-traded fund, is a type of security that’s made up of other securities. 

Depending on the ETF, it may hold a combination of stocks, bonds, commodities, or other types of investments. When you invest in the ETF, you’re investing in all the securities within the fund.

There are a variety of ETFs to choose from. Some specifically track the S&P 500, while others include only bonds. They can also focus on a particular sector. You might invest in an ETF that allows you to invest in many different technology companies or healthcare companies at once.

There are several benefits to investing in ETFs over individual stocks. 

First, it saves you from having to research the best types of stocks and bonds to invest in. But more importantly, it provides you with a well-diversified portfolio. As a result, one company’s stock performing poorly doesn’t hurt your entire investment account.

Consider your risk tolerance

Anytime you invest, you take on some level of risk. In the case of buying stock, you run the risk that the stock market will crash or a particular company will perform poorly, causing your assets to lose value.

Different types of investments have different levels of risk. 

EarlyBird has designed its investment options to suit any risk tolerance. With ETF portfolios ranging from aggressive to conservative, each investor can choose the right fund for their goals.

Know your time horizon

Time horizon refers to the number of years before you hope to use the money in your investment account. In the case of a custodial account, your time horizon is likely the number of years before the child in your life reaches adulthood.

Time horizon and risk tolerance go hand-in-hand. 

Most financial experts recommend reducing the risk in your portfolio as your time horizon shortens. If you’re investing in an EarlyBird custodial account, that would mean investing the child’s portfolio into increasing conservative funds as they get closer to adulthood.

Conclusion

Investing early for the children in your life is one of the best ways to help them prepare for the future. 

A financial contribution to a child’s future today can grow and compound, having an even greater impact by the time that child grows up.

But one of the biggest things holding adults back from investing for kids is simply not knowing where to start.

Luckily, there are plenty of options available. Whatever goals and dreams a child has in mind for their future, a custodial account can help you support their success by buying stock for them while they’re still kids.

Download EarlyBird on the app store today to start investing in the kids you love.