Investing in shares isn’t something a lot of kids think about.
Life is mostly about friends, school, sports and parties. However I believe that investing in the stock market is not just for adults, it’s a valuable lesson for kids as well. Teaching children about the stock market not only helps them understand the concept of investing, but also helps them learn about saving, budgeting, and managing money. By learning about the stock market, kids can develop an understanding of how the economy works and how to make smart financial decisions. As an added bonus, investing in the stock market can be a great way to build long-term wealth and financial security.
Kids and their parents can learn about investing in a number of different ways. Some books offer great investing advice for children. Barefoot Kids and The Barefoot Investor (both by Scott Pape) come to mind and are worth reading. These books echo Stockspot’s philosophy of low-fee, index investing as the way to build wealth for the long-term.
In this article I discuss:
- The best stocks to buy for kids in Australia
- Factors to consider when buying stocks for kids
- How to buy stocks for kids
- How to buy ETFs for kids
The best stocks to buy for kids in Australia
There are over 2,000 shares listed on the Australian Securities Exchange (ASX) and many more listed on overseas exchanges like the Nasdaq in the U.S.
Here are some of the best stocks to buy for kids in Australia:
- Google (Alphabet)
When investing for children you should be looking for companies that will be around for many years to come. You also want to look for companies that create products or services that your children use so that you can have a conversation with them about how companies make money and distribute that money to shareholders via dividends.
Diversification is also critical. Most companies fail so owning individual companies is very high risk even if they have been around for many years. We only recommend for clients investing for kids to invest into a portfolio of at least 100 companies which you can easily do these days via an exchange traded fund or ETF.
ETFs are listed on the stock exchange and provide direct access to a wide range of investments such as Australian shares, international shares, bonds or metals. They are perfect for growing and preserving long term wealth for kids because they are diversified across thousands of companies so you dont need to take too much risk on any particular company.
If you’re thinking about investing in ETFs for your child, you can set up a minor’s account where the investment is held in your name as trustee, with your child listed as the account designation. This means you’ll be in charge of the investments until your child turns 18, when they can be transferred across to them as an adult. To ensure you choose the right investment structure, it may be a good idea to seek advice about the tax implications, such as ongoing tax on income and future capital gains tax.
You can learn more about Stockspot’s investing for kids accounts here https://www.stockspot.com.au/investingforkids/.
Factors to consider when buying stocks for kids
When considering investing for your child, there are a few key factors to keep in mind.
First and foremost, it’s important to understand your child’s investment timeframe. Are they looking to invest for a few years or are they investing for the long-term?
One of the most powerful benefits of investing for kids is the power of compound growth. Compound growth is the process of earning interest on interest, and it can have a significant impact on the growth of an investment over time. The earlier a child starts investing, the more time their money has to grow and take advantage of compound growth.
In this video I share some games you can play with your child to show them the benefits of compound growth:
Another key factor to consider is diversification. Diversifying a portfolio across different assets, industries and countries can help manage risk and maximise returns. When the overall market, measured by a stock market index like the S&P ASX/200 goes up, it means that the stock prices of most of the companies in that index have also gone up. But not all companies will see their stock prices go up at the same rate or even at all. Some companies might not do as well and their stock prices may not increase as much or may even fall. Two-thirds of stocks in the index underperformed the market index between 1980-2014 according to a study by JPMorgan. The huge majority of overall index returns came from less than 7% of shares. In other words, if you pick a share at random (which most people do) it will probably lag the market. This is why it’s critical to diversify your child’s investments by investing in the whole market. One of the best ways to do this is using index exchange traded funds, otherwise known as ETFs (which I’ll explain later).
It’s also important to consider the tax implications of the investments. Some investments may be taxed at a higher rate than others, or lead to higher tax due to a high level of buying and selling, so it’s essential to choose investments that are tax-efficient.
Ignore short-term market movements
Finally, it’s important to be patient and not get caught up in short-term market movements. By taking a long-term approach and considering these key factors, you can help your child build a strong foundation for their financial future.
How to buy stocks for kids
When it comes to investing for children, there are a few options to consider; actively managed funds, ETFs, investment bonds, and individual shares. Each option has its own set of pros and cons, and understanding these differences can help you make an informed decision on what’s right for your child.
Individual shares offer the potential for high returns, but they also come with higher risk. Investing in individual shares requires more research and monitoring, and it’s important to be aware of the specific risks associated with each company. If you’re not prepared to continually monitor and manage individual stocks, this may not be the best option for your child.
Actively managed funds
Actively managed funds (including Listed Investment Companies or LICs) are managed by professional fund managers who make investment decisions on behalf of the investors. These funds have the potential to outperform the market, but they also come with higher management fees and the risk of underperformance. Our research shows that 74% of managed funds underperformed the market over the last five years. Research by S&P has shown that even more active funds underperform over 10 or 20 years.
Investment bonds are another popular option to help kids invest. An investment bond is a ‘tax paid‘ investment. This means the tax on investment earnings is paid by the bond issuer at the (current) company tax rate of 30%. After 10 years from the start date of the investment you don’t need to pay personal income tax on the investment. Investment bonds have a tax benefit, however, we found the returns from investment bonds have been poor compared to alternative options like a mix of low-cost index funds (ETFs), even when you take the tax benefits into consideration. You can read our research into investment bonds for kids here.
ETFs are a basket of securities that track a specific market index. ETFs are our preferred option for kids because they are low-cost, diversified and generally tax-efficient for long-term investing.
Ultimately, the best option for children will depend on their goals, investment timeframe, and the amount of research and monitoring the parent is willing to do. At Stockspot, we believe in the power of diversification. Owning a mix of different types of investments can help balance out risk and increase the chances of success in the long-term.
A few years ago I launched Stockspot investing for kids. The idea was to give children the opportunity to learn about investing early in life, like I was lucky to do at an early age. We now have more than 3,000 children investing around $30 million.
How to buy ETFs for kids
Investing into a portfolio of ETFs with Stockspot for kids can offer several benefits.
- Diversification: Stockspot offers a diversified portfolio of low-cost ETFs, which can help spread the risk and aim to maximise long-term returns.
- Professional management: Stockspot is managed by experts who make investment decisions and continuously monitor and adjust the portfolio to adapt to market conditions. Stockspot also has investment options for the whole family.
- Low fees: We don’t charge any management fees on kids accounts until the balance reaches $10,000 or the child turn 18. That means the only fee that kids will incur is the indirect ETF cost which is typically around 0.30% p.a. Once kids turn 18 or their balance reaches $10,000, Stockspot’s low management fee means that more of the investment return is kept by the kids.
- Easy-to-use: Stockspot’s online platform and app are user-friendly and easy to navigate, making it easy for kids and parents to track their investments and monitor their portfolio.
- Educational resources: Stockspot also provides educational resources and information including my Kids investing YouTube video to help kids and parents understand the stock market and make informed investment decisions. We’ve published more than 400 educational blogs and produced more than 100 YouTube videos to help our clients stay informed.
- Tax-efficient: Stockspot’s investment strategy is more tax-efficient compared to active investing, which means that less of the investment return is lost to taxes.
Overall, investing with Stockspot can provide a simple, low-cost and diversified way for kids to invest in the stock market, with the potential for long-term growth and a financially secure future.
A final message to parents and grandparents
Investing at a young age can be a powerful tool for children to secure their financial future. Not only does it teach them valuable lessons about managing money, but it also gives their savings time to grow through the power of compound interest and diversification.
Let’s empower our children with the knowledge and skills to invest wisely, and set them up for a financially successful future.
If you want to learn more about investing for kids, my YouTube page has a kids investing series of videos with some more tips and ideas: https://www.youtube.com/playlist?list=PLG_2uoxbwYhLPOeZN1KRh4n1XkkXzOxtY