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Encouraging kids to start their own stock portfolios
BY LARRY MAGID
Special to the Mercury News September 10, 2000
Here's a news flash for those of you who are worried about being able to afford to send your kids to college. If you start with nothing and invest $100 a month from the time a child is born, you'll have more than $60,000 squirreled away by the time your baby is ready for college, assuming a 10 percent rate of return. If you start off with a $2,500 lump sum, the figure climbs to more than $75,000. Of course, you can't assume that rate, and there are other factors, including how much time you have and how much money you have to invest.You can do your own calculations with some savings calculators that you can find at www.safekids.com/calculators.htm.
Better yet, if your kids are old enough, have them do the calculating with you. It might surprise them to learn about the power of compound interest and return on investments.
Speaking of investments, you might want to encourage your kids to start their own portfolio. In the past, that's been a daunting challenge because it hasn't been cost effective or sometimes even possible for kids to invest small amounts of money in the market. But a new breed of investment services allow you to invest any amount of money in the market, even if the price of a single share of that stock exceeds what you have to invest.
ShareBuilder.com and BuyAndHold.com allow you to purchase partial shares of stock. A child could, for example, buy $25 worth of IBM even when IBM is selling for about $135 a share.
These services are not designed for day traders or anyone else that hopes to make a quick buck. Unlike traditional brokerage houses, they aren't designed to encourage intra-day trading. ShareBuilder buys shares only once a week (on Tuesday), while BuyAndHold purchases twice a day (mid morning and late afternoon eastern time).
In addition to being able to buy partial shares, these services charge much lower commissions than even discount online brokers. Sharebuilder.com charges $1 per purchase for a custodial account for your kids or $2.00 for an adult's account. It costs $19.99 to sell a security, which is done only on a real-time basis. You can also buy securities in real time for $19.95, but real-time trading isn't really what this service is all about.
BuyAndHold charges $2.99 per trade whether it's a buy or a sell. You can authorize these services to deduct funds directly from your checking account, so it's easy to fund your investments.
What's nice about these services is it makes it possible to get your kids involved in the stock market for a relatively small amount of money. As the parent, you have complete control over how much they invest and what they invest in, but I think it's a great idea to let the kids do the research and have a say in where their money goes.
Even kids who aren't market savvy generally know about public companies that might interest them, including those companies that make products, software, movies or music that they consume. My kids got a few shares of Disney stock when they were very young and liked the fact that they were a part owner of the theme parks and movies they enjoyed.
While it's possible to make individual securities purchases on these services, they are mainly designed for families who want to make regular purchases on a sustained basis.
ShareBuilder.com, where my kids and my wife and I have accounts, encourages its members to make recurring transactions where they invest a regular amount of money on a monthly or weekly basis. If you invest monthly, your transaction takes place on the first Tuesday of each month, regardless of how the market is doing.
The practice of investing a certain amount each month, regardless of share prices, is called dollar-cost averaging. If the share price is low, you get more shares. If it's high, you get fewer shares but your account is worth more. Many financial experts agree that it's a good way to reduce risk and generate sustained growth over a long period of time.
Of course, there is still a risk that your -- or your child's -- investment could go down in value. It might fluctuate downward a bit or it might crash and burn. As a parent, it's your responsibility to help your child invest in a way that is sensible but it is also your responsibility to explain that markets are risky and that your child might get some undesirable news from time to time. Obviously, the level of detail you explain depends on the age, sophistication and interest level of your child.
Although ShareBuilder doesn't sell mutual funds, it does let you buy index stocks such as the Standard and Poor's (SPY) fund that tracks the entire S&P 500 or the Nasdaq 100 (QQQ) that tracks the top 100 most actively traded Nasdaq stocks or the Dow Jones industrial average (DIA) stock that tracks the 30 companies that make up ``the Dow.''
What's nice about these index stocks is that they tend to lower risk and they can keep your kids more involved because ``the Dow'' and ``S&P'' and ``The Nasdaq'' are in the news every day.
Don't expect your child to maintain a sustained interest in the market. While some kids may become financially savvy, others may take a short-term interest and then move on to other things -- like sports, games or love interests.
But just because your kid's interest wanes doesn't mean that you're not having an impact. The lessons your child learns about the market and the value of saving and investing at an early age could yield enormous benefits later on.
