Best Investment for Kids: How to Open a Brokerage Account for Your Child
July 1, 2021
Investing doesn’t have to just be for adults. Do you want your kids to learn a valuable lesson about money and investments? Then help them open a brokerage account!
Best Investment for Kids
Successful investing comes with long investment periods, and kids have that time. If they’re willing to have their money invested for a few years, they’re bound to have a great return on their investment.
Watching as their money grows can also inspire them to be better investors and money savers as adults, which is what matters.
Below are some things that you should consider when looking for the best investment for kids, including what types of investments are the best for kids, how to choose an investment account, and how to open a brokerage account for your child.
Figure Out Which Account Type is Best for You
To get your children started with investing, you first need to figure out which investment account is the best one for them. This decision depends on if they earn income or not.
If your kid doesn’t have taxable wages or income: Under the Uniform Gift to Minors Act or Uniform Transfer to Minors Act, you are allowed to open a custodial brokerage account for your child. However, the brokerage account starts in your name, and your child will take over control of the account once they reach the age of 18 or 21 – depending on state regulations.
If your kid has taxable wages or income: If your child is older and has earned income, you’re able to help them open up a custodial IRA account. In particular, Roth IRAs are ideal for kids: the contributions that your children make will grow tax-free, and the contributions can be pulled from the account at any time. So, the investment can be tapped for education or retirement.
Pick the Best Broker
It doesn’t matter which brokerage account is opened for your child; you’ll have to start by finding the right broker. To help you find a brokerage account that’s best for your child, search for an online broker that won’t charge account fees and doesn’t require a minimum starting deposit. This allows your child to start investing using little starting money.
Think about the costs related to the type of investments that your child wants to go with. For instance, if they want to trade stocks, you’ll want to find a broker that charges no or low trade commissions.
If your child just wants their money to grow without them touching it, look for a broker that has a huge selection of low-cost index funds.
Open the Investment Account
You’re able to open an investment account – both a Roth IRA and a regular brokerage account – for your kids in less than 15 minutes, and with most brokers, the process is completely online, which makes it go even faster!
To speed the process up, ensure that you have all of the needed information ready to go. The broker will most likely ask you for both you and your child’s Social Security number, contact information, and birth dates.
You’ll probably also have to give them your employment information, and you should be prepared to link another brokerage account or a bank account, so you’re able to transfer money into the new brokerage account.
Help Them Decide What They Should Invest In
After the account is opened and has been funded, the fun begins: investing.
With their investment account, your child will have the chance to invest in exchange-traded funds, index funds, and mutual funds, as well as individual stocks.
To help get your child excited about starting to invest, we encourage a two-step approach:
Allow them to pick up to three individual stocks: Focus on names that they’re familiar with – owning a single share in popular brands such as Disney or Snapchat will get them excited about investing their money. It’s easier for kids to relate to brands that they know than brands that they don’t.
Fill the portfolio with low-cost index funds: When your child adds money to their brokerage account, we recommend avoiding adding more additional individual shares of stocks and instead focus on ETFs or index funds. These will bring some much-needed diversification to their portfolio because they pool hundreds of stocks together in a single investment. This way, your child invests in several different companies with a single transaction.
Once your child has chosen and made their investment option, make it a habit to check their losses and earnings every couple of days and compare the small fluctuations with the larger long-term changes.
Doing this will start a discussion and inspire your kids to become more informed investors when they become adults.
The best investment option for kids is opening a custodial account in your name or their name if they earn taxable income or wages. By doing this, you’re allowing your child to experience the world of investing without all the risk.
You can help teach your child about making great investment choices by helping them choose a few individual stocks and different investments that they know and love and then helping them invest in index funds to add diversification to their portfolio.
By checking their account every few days, you can start conversations with your child about investing to help educate them about why investing is important and why their earnings and losses are different in the short term and long term.