MONEY MANAGEMENTFrom the Virginia Society of Certified Public Accountants - Presented by Dean Knepper, CPA, CFP®
HOW TO HELP YOUR CHILD BECOME STOCK MARKET SAVVY
(September 23, 2005) — Teaching your children about the value of investing is an essential part of preparing them for the future. If you are not sure how to get started, the Virginia Society of CPAs provides answers to common questions parents have about introducing children to investing.
What’s the best way to introduce my child to the stock market?
Before you start building an investment portfolio, it’s important for your child to understand some basic investing concepts, beginning with how investing differs from savings. Use examples to show how you might “save” for a short-term goal, such as buying a video game, and “invest” for long-term objectives, like college tuition. Next, cover the basics, including the importance of diversification, liquidity and the correlation between risk and reward.
How do we start building an investment portfolio?
Before your child actually invests any real money, it’s a good idea to set up a mock portfolio. The Internet offers a number of investing simulation games. Or you can do this on your own by helping your child construct and monitor his or her own portfolio of stocks. Like adults, child investors should invest in what they know. Have your kids compile a list of companies that make products they are familiar with. Disney, PepsiCo, Nike and Microsoft are a few that quickly come to mind.
Help your child look in the financial pages or on the Internet to find the current price of each stock. Every week, for a few months, monitor the company’s financial performance. Also encourage your child to look for news stories about the companies selected. Will the new spokesperson for Nike push up its stock price? Is the latest soft drink on the market likely to flatten Pepsi’s growth? This might be a good time to explain the virtue of riding the market’s ups and downs.
OK, you’re ready to invest. Now what?
When you feel your child is ready to enter the market for real, you have two options. Buying a mutual fund is the simpler approach, but kids may find it more exciting and easier to relate to a company rather than a “faceless” fund. Your child can use experiences with the mock portfolio as the basis for buying decisions.
Should you decide to go with a mutual fund, there are thousands of funds to choose from and most hold investments in some kid-friendly companies. In fact, there are a few mutual funds geared especially for young investors and these often provide educational materials as well. Before investing in a mutual fund, you and your child should review the fund’s past performance. Once opened, carefully examine the monthly or quarterly statement you receive.
How do I open a stock account for my child?
Minors cannot own stocks or open brokerage accounts in their own names. However, parents can set up custodial accounts under the Uniform Gifts to Minors Act or the Uniform Transfer to Minors Act (depending on the state of residence). These accounts are opened with the child’s name and Social Security number, but the custodian controls the account until the child reaches the age of majority.
Whether you open a mutual fund or brokerage account, be aware that any net investment income above a certain level ($1,600 for 2005) received by a child under age 14 at the end of the tax year is taxed at the parent’s marginal tax rate.
How can my child invest without paying high fees and commissions?
Many companies allow you to make initial stock purchases directly without going through a broker. The company’s dividend investment plan (DRIP) is used to buy additional shares. There are also sources available on the Internet, such as www.oneshare.com, that allow you to buy a single share, and several discount brokers featuring no account or investment minimums.
To put your child’s investment strategy on track, start by consulting
with a CPA [and a CERTIFIED FINANCIAL
PLANNER™ professional] who can advise you on where
to begin and the potential tax consequences of your decisions.
The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at www.vscpa.com.
Lifetime Financial Planning, Inc.
Dean Knepper, CPA, CERTIFIED FINANCIAL PLANNER™ professional
2325 Dulles Corner Boulevard, Suite 500, Herndon, Virginia, 20171
208 South King Street, Suite 201, Leesburg, Virginia, email@example.com
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