Imagine last-minute holiday shopping with no crowds, just a few clicks online and a gift that will get more valuable over time. A stock, mutual fund or exchange-traded fund might be just the thing.
In the past, savings bonds have fit the bill for many parents and grandparents. But they’ve become too stingy to bother with, now yielding only about 1.8%. Fortunately, the advent of discount brokerages, mutual funds and, more recently, exchange-traded funds has made financial gift-giving easier.
For most parents and grandparents, the first step is to decide whether a financial gift to a child is meant as a teaching tool or a long-term investment for college or some other purpose.
On a percentage basis, the sales commission can be steep on a very small trade, but that may not matter for a one-time purchase to help a child’s financial education. Many discount brokerage firms have very low minimum investment requirements for custodial accounts for children. These accounts are controlled by an adult until the child reaches 18 or 21, depending on the state.Charles Schwab (Stock Quote: SCHW), for example, requires an investment of only $100 to open a custodial account. TD Ameritrade (Stock Quote: AMTD) and E*Trade (Stock Quote: ETFC) have no account minimum.
Another option is the Sharebuilder unit of Ing Direct (Stock Quote: ING). It has no account minimums and commissions of only $4 a trade, though trades are executed only once a week at that day’s price.
If the gift is not an educational device but a real investment, mutual funds and exchange-traded funds are probably the best bet, since they offer more diversification than you can get investing a small sum in individual stocks.
Many mutual fund firms have lower minimums for opening custodial accounts than for ordinary accounts, depending on the individual fund, though choices are limited if you want to invest less than $500. If you want to put in less than the fund company requires, buy the fund through one of the discount brokerages. Some charge little or no commission for certain funds.