Your Kid, the Investment Guru

Kiplinger's Personal Finance Magazine, Dec, 1999 by Janet Bodnar

When you help your kids invest, you're getting more than a share of stock.

I have a grandchild (age 10) who is interested in getting into the stock market, and I was wondering if you could suggest some companies that will sell one or two shares direct to the individual. These would be companies that the child could relate to and find interesting. --DAVID CARR (VIA E-MAIL)

I am looking for a way my daughter can invest in the stock market by buying a few shares and not being assessed astronomical charges and fees. Is there anything you can recommend? --ANAMARIJA LAKATA (VIA E-MAIL)

As the Kiplinger's expert on kids and money, I get a flood of questions about how to introduce kids to the stock market--not to mention an occasional poke in the ribs and conspiratorial wink from friends who assume that my own three children must be off and running on Wall Street. "So, what do your kids invest in?" they ask (poke, wink). At one point my editor even suggested that this story be titled "My Kid, the Investment Guru."

Catchy, perhaps, but I'm not there yet. While as a writer I try to practice what I preach, as a parent I have had mixed success. A couple of years ago when Charles Schwab ran-a special deal allowing holders of custodial accounts to make one commission-flee trade, each of my kids invested $150 in a stock of his or her choosing: PepsiCo, Walt Disney and Hershey Foods. Since then Schwab has not repeated its no-commission promotion, and the kids haven't bought more stock. But the seeds have been planted, and as the children grow I hope their interest will, too, along with the size and diversity of their portfolios.

For some kids, the investment spark is effortlessly fired. Playing a stock-market simulation game in school was all it took for 14-year-old Will Andersen. Says the Conyers, Ga., teen: "We were trying to make quick money, so we'd buy eBay or America Online, which might go up 15 points one day and down ten the next." The next logical step was to put his own money--from a savings account, summer earnings and gifts--to work. That's when he began to lean more conservatively toward big growth companies such as Home Depot and Wal-Mart. "They had pretty good long-term growth," says Will. "I'm willing to take a little risk so my money will grow, but not a huge risk so that it will change dramatically."

Go with what you know

Choosing stocks suitable for children is the easy part--just ask kids themselves, who intuitively live by the Peter (Lynch) principle of investing in what they know. If your kids are still young, choose something you know.

When Mark Stephens of Raleigh, N.C., began investing for his son, Hugh, 4, he chose two local utility companies--Duke Energy and Public Service Co. of North Carolina--because he could buy initial shares directly from the companies, bypassing a broker, for a minimum outlay of $250 each. "My strategy is to save pocket change, and whenever I get $100, I dump it into one of the companies," says Stephens. "I started to go with something like Wrigley or McDonald's, but I'm just not thrilled with those stocks, and at this stage Hugh doesn't care."

But some kids do care. Members of the Stock MarKids investment club, in Washington, D.C., actually held meetings at McDonald's restaurants when they started their club three years ago as 9- to 11-year-olds. "We tried to show them that investing is about what you purchase," says Pat Smith, whose daughter Shannon is a club member. That's why the club owns General Electric and Johnson & Johnson. But it also bought shares in Trusted Information Systems, a local high-tech firm, so the children could attend a company's annual meeting.

Using a broker

Stock MarKids bought McDonald's through the company's MCDirect stock-purchase plan, although it took them a while to come up with the $1,000 minimum initial investment. But for other purchases they've used a traditional discount broker because trade execution is faster and "we can specify a target price," says Smith.

Regardless of whether you or your kids are buying the stock, purchases for minors under age 18 must be made through a custodial account. Don't worry: All you do is fill out a form from the broker with the child's name and social security number and the name of the custodian.

Nowadays one of the cheapest and speediest ways to trade small lots of stock is online. Unfortunately, many online brokers require a minimum of $1,000 or more to set up an account. But a few brokers let you open custodial accounts with as little money as you want: DLJdirect (888-456-4355; www.dljdirect.com), Suretrade (800-909-6827; www.suretrade.com) and Web Street Securities (800-932-8723; www.webstreet.com). Of those, Suretrade offers the lowest commissions--S7.95 for market orders.

If you don't like the impersonal nature of trading by computer terminal and would prefer the security of hearing a human voice over the phone, discount brokerage Bidwell & Co. (800-547-6337) will charge a commission of $20 plus 8 cents per share for trades of up to 500 shares. There's no minimum investment to set up a custodial account and no minimum trade. If you already have a working relationship with a full-service broker, you may be able to cut a deal involving a custodial account for your child to pay less than the standard commission.