Top Stocks To Buy For Your Kids 

There are gifts for children that offer short-term excitement, and then there could be gifts with the ability to create long-term value for your kids.

In the current economic scenario, nothing could be more important for parents than to teach their children the value of money and its prudent management. Parents and grandparents can really help their children lead a happy life by instilling in them from the very beginning a sense of:

• saving,
• budgeting and
• debt management, as well as
• teaching them about how money can work for them.

One of the most convincing reasons for building a portfolio for your child early is to financially secure their future. An excellent example of cultivating a habit of making your money work for you is that of Warren Buffett.

The current chairman and CEO of Berkshire Hathaway, with a net worth of over $109.5 billion, is widely recognized as one of the most successful investors of all time.

Popularly known as the ‘Oracle of Omaha’, Buffett bought three shares of Cities Service at around $38 per share when he was 11 years old. He sold the stock at $40, making a $2 profit per share. How does this example relate to young investors today?

Well, according to a 2020 Experian report, Gen Y or Generation Y (also known as “millennials” born between the 1980s and early 2000s), have on an average over $27,000 in debt spread over personal loans, vehicle loans, credit cards and educational loans to name a few.

As per another report, an American on an average spends close to 35% of his income on debt repayment. A contentious issue sometimes, still over 50% of parents prefer investing in their children’s education in contrast to saving the money for their retirement.

By choosing the Warren Buffett approach instead – investing hard-earned savings – in recognition that a $1 today is worth more in the future, parents can compound wealth versus paying off ever higher levels of debt that grow as interest compounds. But what investments are best and what are the top stocks to buy for your kids? Let’s start with whether it’s even legal for kids to invest.

Is It Legal To Buy Stocks If Under 18yo?

Investing refers to a commitment of two things: money and time. In other words, investing means putting your money in an asset (a company, a property or a project) for a certain period of time, hoping that you will benefit from the appreciation in the asset you have made an investment in.

There is, however, no guarantee that the asset will appreciate in value, which means investing carries with it a certain amount of risk. However, with some research, help and judicious use of resources, you can maximize your profits while negating risks to the maximum extent possible.

Investing under 18 is not legal in the US. In fact, a person has to enter into a legal contract on his own in order to start investing, which is only possible at the age of 18, the age when someone is considered a legal adult.

A very important factor to take note of here is that there are some states in the US, where the age restriction is even higher. For example, a resident of Nebraska, Alabama, and Delaware is considered a legal adult at the age of 19. This age restriction goes up even further in states like Mississippi where people can only start investing at the age of 21.

How Old Do You Have To Be To Invest?

Just because you are not recognized as an adult, does not mean you have to give up on your dream of investing in stocks.

Investing is for children as well, and it’s never too early to start. In fact, there are a few ways in which you could circumvent age-related investing rules to purchase individual stocks you or your parents may find appealing.

Here are two ways to start your investment journey as soon as possible (even when you are under the legal age to open a brokerage account).

[1] Open a Custodial Account

Children, who are yet to reach 18 years of age, can start investing by enlisting the help of their parents or legal guardian.

There are two Acts, the Uniform Gift to Minors Act (UGMA) and the Uniform Transfer to Minors Act (UTMA), which give parents the right to invest on behalf of their children.

With the help of these Acts, parents can open a custodial account and begin buying and selling stocks. Initially, the account will be in the parent’s name, but the child will assume full control of it on reaching the age of 18 or 21, depending on state laws, and can begin investing in it as a legal adult.

[2] 529 Savings Plan

You will need the help of your parents or legal guardian for this method as well.

A 529 college savings plan, legally known as “qualified tuition plans”, is a tax-advantaged state-sponsored investment plan designed to encourage saving for future educational expenses such as tuition, boarding and textbooks to name a few. 

Your investments grow tax-free, and withdrawals too are exempt from both state as well as federal taxes, provided the money is expressly used for qualified educational expenses.

Withdrawals for almost any other purpose other than to cover educational expenses is likely to invite taxes plus a 10% penalty.

Can I Buy Stock for A Child?

It’s not only adults who can own stocks. Guardians can buy stocks for their children by setting up a custodial brokerage account for their kids.

In fact, opening up an account can teach your children valuable lessons about investing and the importance of money management.

Buying stocks for your child means giving them something of value that could last a lifetime.

Decide on Account Type

To purchase stocks that you think are going to be good investments for your children, you need to first and foremost decide about the investment account best suited for them. This decision though is largely dependent upon whether they are earning an income or not.

• If your child doesn’t have taxable income or wages, you should open a custodial brokerage account for your child. Formally referred to as a Uniform Transfers/Gifts to Minors Act (UTMA/UGMA) account, a custodial brokerage account allows a parent to make all the investment decisions for the child until the child reaches adulthood (18 or 21, depending on state laws), and takes full control of it.
• If your child has taxable income or wages defined by the IRS as “all the taxable income and wages you get from working…for someone who pays you or in a business you own”, you can open a custodial IRA for them. It is an Individual Retirement Account that a custodian (typically a parent) sets up and manages for a minor with an earned income. A custodial IRA allows the account holder (in this case, your child) to contribute after-tax dollars toward retirement, i.e., the contribution the child makes grows tax-free.  All assets are managed by the custodian (the parent), until the child reaches age 18 or 21 depending upon the residential state. The money can be pulled out anytime, and can be used for expenses like tuition fees or even a home purchase. 

Types of Custodial IRAs for Kids

Custodial IRAs for kids can be either a Traditional IRA or a Roth IRA.

With a Traditional IRA, the money can grow tax-deferred, but taxes have to be paid (at contemporary applicable tax rate) on withdrawal at retirement. 

In case of Roth IRA (named after William Roth, a former U.S. senator from Delaware), you pay taxes on money going into your account, but your contributions and earnings can grow tax-free. Also, all future withdrawals are tax free.

Where Can I Buy Stock for a Child?

To buy stocks for a child, you need to set up a custodial account. A custodial account is a financial account set up and managed by a parent, legal guardian, grandparents, or another relative or family members for a minor.

The child assumes control of the account when he or she reaches adulthood. As far as custodial accounts in the US are concerned, they are governed by two acts:  

• Uniform Transfers to Minors Act (UTMA) and
• Universal Gifts to Minors Act (UGMA).

Custodial accounts as such are often referred to as UTMA or UGMA accounts, which more or less are same with a few differences. UGMA account allows you to hold assets such as stocks, bonds, and mutual funds. UTMA on the other hand offers a broader scope as it allows you to cover more assets including, real estate, jewelry, and art.

Custodial accounts can be savings or investment accounts. They are usually held at investment brokerages, banks, and other financial institutions. Investment accounts should be generally favored as they offer a chance of higher returns in comparison to low interest offered by banks.

You can open a custodial account for your kids through a low-cost broker that offers commission-free trades. You will control the investment, but your child will get the final ownership upon attaining adulthood. However, you need to be cautious with your investment strategies, and pick up a stock only if you are convinced about its long-term growth prospects, and not just by how much your kids love what the company makes. 

The first thing you need to pay attention to is the fees charged by the brokerage firm. There are firms that may charge account maintenance fees in addition to trading fees or commissions. While trade fees up to $5 per trade are common, firms which charge regular trading fees even when no trading activity is taking place should generally be avoided. 

Another important factor to consider is to look at the range and breadth of investment options offered by the firm. This generally varies from one financial management firm to another. There are some that provide access to a wide range of stocks, bonds, ETFs, mutuals funds and other securities, while others may offer a very limited range of investment options. It always helps to assess your priorities before you choose any particular firm.

Also of importance is the investment support offered by the brokerage firm. A little bit of help is always appreciated, which means look for a firm that provides access to investment research, tools, advice, resources, and strategies to help you make prudent investment decisions. Some like Schwab also offer the option of purchasing fractional shares starting at only $5.

Now that you are aware of what to look for in a custodial brokerage account, we provide here a list of few well-known custodial accounts available today.

Acorns

Acorns Early is a UTMA / UGMA investment account for children launched by micro-investing company Acorns.

You can open this investment account from the time your baby is born. Unlike the 529 plan, which can only be used for education, it offers far more flexibility as the money can be spent on a variety of things benefitting the children.

Your Early UTMA / UGMA account can be transferred easily to the child when he/she hits adulthood as per the prevailing resident state laws.

It should be noted that the option to open just Acorns Early account is not available. This investment account for kids comes bundled together with other accounts offered by Acorns:  Acorns Invest, Acorns Later, and Acorns Spend – which together make up the Acorns Family plan.

Joining the Acorns Family plan costs $5 per month for most families. However, if your baby was born in 2020, you get free membership until the child turns 18 and the account is transferred into the child’s name.

Accounts Early is a good option for parents who are already an Acorns member, or want access to other type of accounts offered by Acorns. Also, parents can qualify for a free Acorns Family plan if the baby is born in 2020.

Additionally, you may want to open an Acorns Early if you prefer a UGMA account over 529 account.

Acorns also provides financial literacy content for families in collaboration with CNBC. Acorns has formed partnerships with family-oriented businesses for Acorns Family members, including Disney+, ABC Mouse and HelloFresh, and more.

Also, Acorns Early offers the facility to open accounts of multiple kids per family at no added cost per child.

M1 Finance

M1 Finance is an internet-based, all-in-one financial management platform, offering users facility to invest, save, spend and borrow money for their financial needs.

M1 offers brokerage accounts, retirement accounts, trust accounts and custodial account (for children).

M1 Custodial account for children

M1 custodial accounts (both UTMA and UGMA accounts) are exclusively available through the M1 Plus membership.

The annual charge for M1 Plus is $125, but the company of late has been running regular promotions on this service, offering membership free for the first year.

Besides custodial accounts (which allow you to build your child’s portfolio as you want), M1 Plus comes with the following benefits:

• Two trading windows per market day when you have $25,000 or more in equity. (A regular M1 account only has one).
• Smart Transfers that move funds from one M1 Pie or account to another.
• Better margin loan rates, though custodial accounts do not qualify for borrowing.
• 4 monthly ATM fee reimbursements
• No international fees are levied on purchases made through debit card
• Low APY interest on M1 Spend, the company’s checking account.

Also, the company specializes in Pie investing, which is a basket of assets (specifically, stocks, ETFs, and closed-end funds) created by the company. 

Schwab

Investopedia terms Schwab One Custodial Account as the best overall custodial account because of its long presence in the industry, customer support and service (24×7), and minimal fees.

This account includes all the features and benefits of the flagship Schwab One investment account, but is opened under UTMA or UTGA, which means the account is held in the name of a minor.

The account comes with investment help and guidance with:

• no minimum opening balance,
• no maintenance fees, and
• no monthly fee.

Schwab gives you access to a wide range of investments with strong research offerings, tools, strategies, and analysis from the industry’s top research firms.

Another major benefit offered by Schwab is that it allows you to manage your custodial account with the same credentials you use to log in to a Schwab brokerage account.

Also, with Schwab Stock Slices, you can use your custodial account to purchase fractional shares starting for as little as $5 each.

Top Kid Friendly Stocks to Own in the US

As a parent, you no doubt want to help your children gain a better understanding of how saving, taxes, investment and entrepreneurship work in tandem for a life of financial independence and empowerment, so it is important to find best stocks to buy for your child.

Here are ten companies that kids can get excited about owning.

The Walt Disney Company

One stock that should be strongly considered for your child’s portfolio is The Walt Disney Company [NYSE: DIS].

Buying Disney for your children could turn them into buy-and-hold investors for life. The pandemic, no doubt, proved to be a dampener for the family entertainment and media behemoth, as the company ran into an annual loss for the first time in 40 years for its 2020 fiscal year.

Most of the company’s parks were closed or operated at limited capacity, and its cruise ships were docked for the better part of a year. 

The stock also took a hit because of a slowdown in Disney+ subscriber growth. However, this should not concern you as a parent because Disney is a well-established blue-chip name with lucrative future growth prospects.

The odds are that come summer traffic will return in droves to the company’s iconic theme parks and cruise ships because of the pent-up demand.

Disney may need time to fully recover, but remember you want to teach your kids the virtue of being long-term investors, and the company with a market cap of around $250 billion is a solid fit for that.

Also, don’t forget the fact that DIS owns and operates amusement parks, film studios, television stations, and streaming services, including ESPN, ABC broadcast network, FOX, National Geographic, Hulu, Hotstar, and more, along with incredibly strong film studio division including, Walt Disney Pictures, Marvel Studios, Lucasfilm, and Searchlight Pictures among others.

The company is strongly focusing on international expansion, and with all its franchises and brands, the House of Mouse will likely be the indomitable force in the entertainment industry for years to come by attracting both young and adult viewers to its television, broadcasting, streaming media, theme park resorts, films and consumer products.

Meta Platforms (Facebook)

Parents or guardians looking for the best stocks for their children should include a high- growth tech stock like Meta Platforms [NASDAQ: FB].

The global social technology company now known as Meta Platforms, Inc. (formerly Facebook), continues to be the dominant social media platform in the world despite the presence of multiple other popular social media platforms.

FB boasts around 2.7 billion active users in comparison to Twitter’s approximately 310 million users. 100 Facebook shares bought in 2012 for $3,800 around the time the company went public would be worth $27,600 today.

Instagram was purchased by the social media company for $1 billion in 2012. The platform then had around 100 million registered users, but today it has more than 1 billion users and counting.

The exploding popularity of mobile phones has greatly helped its cause with the social media giant deriving 94% of its advertising revenue from mobile users.

Facebook’s cause was greatly helped by the pandemic as people spent more time indoors, and communicated with their friends and family members via social media platforms.

In its latest quarter Facebook’s revenue jumped 35% year over year to more than $29 billion while its net income grew 17% to nearly $9.2 billion. The company is now focusing on virtual reality and augmented reality technology to power its growth.

All in all, the historical growth of Facebook and its current focus on virtual reality makes it one of the must-have stocks in your kid’s portfolio.

Apple

Have you ever wondered about all the money you would currently have if you had spent some dollars purchasing Apple [NASDAQ: AAPL] when the iconic company went public in 1980? Heck, even if you bought shares in 2005 you’d be doing extraordinarily well.

You may have missed a chance to roll in the green dough, but then it’s never too late to help your kids reap the dividends of investing in the iPhone maker.  

Despite contrasting opinions of analysts regarding Apple’s current valuation, it is a good time as any to make a transformation from being an Apple fan to an Apple investor if you take a long-term view.

The iPhone maker, which is the world’s largest company by market capitalization deftly handled supply-chain challenges brought about by the pandemic, posting record sales and easily beating profit estimates.

The popularity of its products can be gauged from the fact that the demand for its iPhones, iPads and other gadgets was more than the company could actually supply. 

Also, boosting investors’ confidence in the stock was the company’s recent announcement by CEO Tim Cook to expand the company’s augmented reality apps.

The company continues to generate strong responses from investors, and with record sales and profits, it is hard to predict the zenith Apple’s shares will reach in the next decade or so.

A gift of Apple stock now could reward your child long after the passion for the current iPhone 13 has subsided.

Hasbro

Kids hardly need any introduction to Hasbro [NASDAQ: HAS], the owner of popular brands such as Nerf, Baby Alive, My Little Pony, Play-Doh, and Wizards of the Coast to name a few.

The company also boasts of a full stack of classic board games such as Monopoly, Transformers, and Scrabble among others.  Recently, it acquired the eOne entertainment company, which helped it bag the popular Peppa Pig brand.

For the past decade, Hasbro has been the sector leader in terms of sales and earnings growth. Despite recent challenges, it still has plenty going in its favor. The company is keen on diversifying into the entertainment, digital gaming, and sports businesses. It acquired Canada’s Entertainment One company for $3.8 billion at the end of 2019.

It reported earnings per share (EPS) of $1.96 for Q3 2021, and the toymaker’s quarterly revenue was up 10.9% on a year-over-year basis.

With that said, it is currently having to contend with certain difficulties such as supply chain issues, elevated raw material and labor costs, high level of inflation and shipping and delivery problems. Nevertheless, given its history and popularity of its brands, Hasbro is well resourced to overcome these challenges in times to come.

Its foray into digital gaming and entertainment, the timelessness of its brands, a compelling dividend yield and management’s desire and ability to mold itself with the changing times make it a company worth backing for the long haul. 

Amazon

Amazon [NASDAQ: AMZN] was one of the weaker performing stocks of 2021 when compared to its competitors. Its online sales dipped as brick-and-mortar shops reopened while the pandemic eased. Also, the online sales giant had to deal with supply chain and labor bottlenecks.

However, analysts believe the company’s long-term growth prospects remain intact with the rise of cloud computing and popularity of e-commerce as the preferred mode of shopping.

Amazon’s long-term business will continue benefitting from its foray into physical outlets. Its 30,000-square-foot stores are soon to debut in California and Ohio.

Also, Amazon is expanding a virtual healthcare program, called Amazon Care, as well as its prescription drug business in the US known as Amazon Pharmacy. Amazon Care “helps patients connect with medical professionals via chat or video conference.”

The online retailer is also keen on tapping into the $350 billion market for prescription drugs by offering Amazon Prime members whopping discounts of up to 80% on generic drugs and up to 40% on branded medicines.

In other ventures, Amazon purchased iconic film studio Metro-Goldwyn-Mayer for $8.45 billion, to further strengthen its position in video streaming.

Also, Amazon’s two highest margin businesses, AWS (Amazon Web Services) and advertising, are expected to put up a strong show this year.

The market went into correction mode as investors grappled with Fed’s decision to cut interest rates to check runaway inflation. The sell-off, like ones in the past, might be a good time to add shares of this fantastic company to your kid’s portfolio at a lower price.

Alphabet

Google-parent Alphabet [NASDAQ: GOOGL] performed exceptionally well in 2021, registering a big jump of 65%.

The owner of Google Search Engine, YouTube, Google Cloud, Google Maps, Google Play, Chrome and Android, Alphabet is a company with one of the largest market capitalizations in the world.

It derives a large portion of its revenue from YouTube, internet search advertising, and cloud computing sales, which are only likely to grow from here making the internet search giant one of the safest bets in the market.

Bank of America predicts that YouTube’s subscription business will reach $18 billion in revenue by 2025, an almost fourfold increase from $5 billion in 2020.

The company is also betting big on its self-driving-car project Waymo, and AI which the company is extensively using in digital advertising, the Google Cloud Platform, YouTube, Google Maps and voice-based search and photos.

Google stocks, like other tech stocks, are currently taking a beating because of higher inflation and expectations of interest rate hike from the Federal Reserve. Google stock has lost more than 10% so far, which in itself offers a great opportunity to dive in. Alphabet has virtually unlimited growth potential, which means the company offers a really exciting investing opportunity.

Nike

Nike [NYSE: NKE] is a great business, and the company did really well during the pandemic as people turned to more comfortable clothes when the pandemic forced them indoors.

Management asserts that the company will keep up with the momentum regardless of economic restrictions, claiming that the preference for fitness and functional apparel is unlikely to fade.

The athletic-apparel company is currently reeling from factory shutdowns and other supply chain challenges related to the pandemic, but management expects Nike to report modest revenue and earnings growth in the current fiscal year on normalizing manufacturing capacity.

The footwear maker’s digital memberships have rocketed 76% over the last two years to reach 300 million in fiscal 2021 to 170 million in fiscal 2019.  It is in a growth mode having set aside a budget of $1 billion for branding and promotions this quarter.

Nike’s stock is currently down over 12% at the time of analysis, which represents an unusual buying opportunity. As a parent, you should definitely think about investing in the athletic-apparel company.

Netflix

As far as annual revenue and number of subscribers are concerned, Netflix [NASDAQ: NFLX] is the numero uno paid streaming video platform in the world.

The streaming giant had a marvelous 2020 as social distancing mandates forced people to connect less frequently in person, and in turn they spent more time on streaming platforms such as Netflix.

The company’s fortune dove in 2021 as restrictions eased and people started spending more time outdoors.  The company, however, is again ramping up its production and licensing of new shows and movies in a post-lockdown world.

Netflix faces some near-term headwinds, as the competition heats up and the company lags behind its rival in countries like India, which is one of its fastest-growing markets in the world. However, analysts still expect its revenue to increase 15% in 2022, and EPS to grow 22% in 2022.

The video streaming market is projected to grow from $ 419.03 billion in 2021 to $932.29 billion in 2028 at a CAGR of 12.1%. Netflix being the market leader in this segment is going to be the major beneficiary of this trend.

In its latest earnings report, the Internet television network reported $1.33 EPS for the quarter, against expectations of $0.82. The company’s revenue for the quarter was up 16.0% when compared to the same quarter a year earlier.

The highlight for the quarter was Squid Game, which was by a long shot Netflix’s biggest-ever TV show; it also had blockbuster movies like Red Notice and Don’t Look Up to boast of.

Netflix also bagged multiple Emmy and Oscar nominations. Add to its quality content the firm’s focus on the international segments and the demise of “linear TV” platforms like cable and satellite TV, and you have all the ingredients needed for success.

Electronic Arts

The video gaming industry is growing and evolving at an incredible pace.  Data reveals that the global games market is expected to surpass $200 billion in 2023, with an estimated player size of 3 billion. If we include gaming-specific hardware and software, the total market size would simply double. At the forefront of such evolution are gaming companies like Electronic Arts [NASDAQ: EA].

A true veteran of the industry, EA is known for devising newer and more innovative ways of generating additional revenue and profitability. 

EA is the second-largest pure gaming company in the United States and Europe both by revenue and market capitalization. The largest is Activision Blizzard, which was currently acquired by Microsoft for $68.7 billion dollars.

Apart from owning and operating several major gaming studios, including DICE in Stockholm and Los Angeles, and EA Tiburon in Orlando among others, EA boasts of famous games franchises, including Battlefield, Need for Speed, Medal of Honor, Titanfall, and Star Wars among others. The company also has several established EA Sports titles such as FIFA, Madden NFL and NBA Live to name a few.

EA is a stock worth considering given that the gaming industry is going to witness precipitous growth in coming years. The shifting perception towards gaming and its acceptance as a normal by the broader public, combined with the evolving business models in the industry augurs extremely well for recognized gaming companies like Electronic Arts.

Add to those children’ familiarity with its well-known titles, and you will understand why it should be in your list of top stocks to buy for your kids.

Mattel

Mattel [NASDAQ: MAT] owns popular toy brands such as Barbie, American Girl dolls, Hot Wheels, Fisher-Price and Thomas & Friends among others, which are very popular with children.

The company has been faltering for many years, but things have finally started to look good for the toymaker. It has been making a comeback of sorts thanks to product innovation, digital offerings, marketing partnerships, and cost-cutting initiatives.

It has been trying hard to regain share among its young consumer base by focusing on new content and digital engagement. Shares of the company have gained 13% in the past year, while the industry overall declined close to 12%.

Mattel recently entered into a multi-year global licensing agreement with Disney to manufacture toy lines for Disney’s Princess and Frozen branded line of products. The company is in the middle of an attempted financial turnaround, and the company’s sales have been rising. Though not in the same league as Disney, Mattel nevertheless presents itself as a stock worth considering for your kids.

How Much Are Gift Taxes?

What is the Gift Tax? The IRS defines a gift as “any transfer to an individual, either directly or indirectly, where full consideration is not received in return.

It should be noted that the IRS has placed a limit on the amount you can gift in a year, as well as over the course of your life. Any amount beyond the stipulated limit will bring into play a tax known as the gift tax. Barring a few exceptions, it is always the donor and not the recipient who is liable to pay a gift tax.

For 2021, the annual gift tax exemption was $15,000 per recipient. For 2022, the amount has been increased to $16,000.

The annual gift exclusion limit applies on a per-recipient basis. This means you can give up to $16,000 to as many people as you want without being subjected to a gift tax.

In case the amount per-person exceeds $16,000, the tax rate applicable varies from 18% to 40%.  There is also a lifetime exclusion of $12.06 million for 2022.

How to gift stock to a child?

Gifting stock to children is a great way of introducing them to investing. An excellent idea is to help them invest money in a long-term growth company they can follow along as they grow.

Buying stocks for a child is a rather simple process. All that the parents need to do is to set up a custodial brokerage account, formally known as Uniform Transfers/Gifts to Minors Act (UTMA/UGMA) account, for their children or another minor in their care.

Custodial brokerage accounts can let parents invest on behalf of their children in stocks, bonds, mutual funds and ETFs.  The child who is named as the beneficiary of the account gains full control of the fund once he/she comes of age, which could be either 18 or 21, depending on the home state.

An important thing to note here is that the funds cannot be transferred to anyone else, which means only the person in whose name the account is opened can have access to it.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.