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.
To get a child interested in the stock market, for example, many people give a share or two in a company the child will know, such as McDonald's (Stock Quote: MCD) or Nike (Stock Quote: NKE).
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.
Before investing in a mutual fund with a very low minimum balance requirement, be sure to look at annual fees, or expense ratios. Fees are often higher for low-minimum funds than for comparable funds requiring $1,000 or more to open an account.
If the purpose of the gift is to help fund a child’s college education, consider a 529 Plan or Coverdell account — both of which allow deposits and investment gains to be withdrawn tax-free for education expenses. Most fund companies and brokerages offer these accounts, and have details on their Web sites.
If you want to give the child an investment that could be used for any purpose someday, consider a simple index-style mutual fund or exchange-traded fund. These track the broad market, or portions of it, and charge very low fees compared to actively managed funds that employ teams of professionals to hunt for hot stocks. Because indexers’ holdings simply mimic those of the underlying index, you won’t have to worry about a fund manager losing touch or leaving the firm.
Most mutual fund companies offer index funds, but Vanguard Group is the big name in the field.
Unfortunately, Vanguard requires $3,000 to open an account in its flagship fund, the Vanguard 500 Index Fund (Stock Quote: VFINX), which tracks the Standard & Poor’s 500. If you want to invest in that index but with a smaller sum, go with the SPDR ETF (Stock Quote: SPY) and buy through a discount broker. Since ETFs are traded like stocks, you can buy just a share or two if your budget is tight.
SPDRs are trading at around $110 a share. Another good choice would be the Diamonds ETF (Stock Quote: DIA), which tracks the Dow Jones Industrial Average. Those are trading around $103 a share.
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