So you’re considering buying shares for your children? Here’s what you need to take into account

If you are a parent considering buying shares for your children, it may seem like a good idea. And it could be, because there are chances to generate returns impossible in any other asset class – you could pay for a house deposit, to pay off their HECS or maybe just to fund their Schoolies trip.

But investing for your kids is different to investing for yourself because you are investing for their future. The investments will likely be long-term, and you might need to account for their specific financial goals and time horizons. Here are some key questions to consider:

The day to day management

Consider whether or not you will own the shares yourself or whether you’ll own them indirectly a custodial account. Then if you’ll seek a professional money manager or DIY. If you choose to DIY, we have one piece of advice: Don’t put all your money into a single stock or sector. Diversifying helps to spread risk. This can include investing in a mix of domestic stocks, international stocks, exchange-traded funds (ETFs), mutual funds, or index funds.

If you’re not familiar with picking individual stocks, ETFs or index funds are great options. They offer diversification across hundreds or even thousands of companies, reducing the risk associated with individual stock picking. Diversify across sectors and between growth and dividend stocks. The latter will be a good idea because these can provide steady cash flow, which can be reinvested to buy more shares, further compounding growth over time.

Children (and even adults) can be tempted to panic when the market goes down. It’s important to have a strategy and stick to it, rather than making emotional decisions based on short-term market fluctuations.

What it will mean for kids

Second, consider what it will mean for the kids. Specifically when the kids will realise the benefits (i.e. at a particular age) and whether it will be them getting control of the shares or if all the shares will be sold and they’ll receive the money. Also note any tax implications for children or for yourself.

If you’re buying stocks for your children as part of an inheritance or generational wealth plan, consider how the assets will be transferred to them. Having a will or trust in place ensures the assets go to your child when the time comes. It can also account for what happens if the child ends up inheriting the assets before the age of majority.

You may use this as an opportunity to notch up their financial literacy. What we’re trying to say here is: If your child is old enough, you may choose to involve them in the process of selecting and managing the investments. Teaching them about how stocks work, the importance of diversification, and the risks involved can help them develop financial literacy that will serve them well in the future.

The end goal

Third, the desired returns, the objective of them and consequential risk-reward balance. As noted above, investing for children is usually a long-term strategy. If the investment horizon is long (10–20 years or more), you may be able to take more risk by investing in growth stocks, which tend to be more volatile but offer higher long-term returns. If the goal is to save for a specific event like a private school, consider how much time you have. If you’re saving for school in 5-10 years, you might want to balance risk by diversifying between growth and more stable, income-producing stocks.

Consider the risks of stocks generally

Do this crazy little thing called due diligence. If you decide to buy individual stocks, do your homework. Invest in companies you believe in and that have a good track record of stability, growth, and strong financial health. Also those that have a good moat and/or a good growth opportunity ahead. While you might want to take some risks, avoid speculative or high-risk stocks, such as those in industries that are extremely volatile (like cryptocurrency or microcap), as they can result in significant losses – often in single trading days, something that wouldn’t be the case with larger stocks.

Penny stocks are where the parties are at.
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So you’re considering buying shares for your children

To make a long story short, it may be a good idea to generate money for your children, but there are plenty of things to consider – both things that must be considered when buying stocks generally and those specific to the circumstance of buying shares for children. To sum it up succinctly: Don’t neglect to look for the long-term, to pick stocks that will gain in the long-term and to

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