If you want to teach your kids some valuable lessons about investing, opening a custodial brokerage account can be a great start. Through the Uniform Transfers to Minors Act UTMA and the Uniform Gift to Minors Act UGMA , you can open up tax-advantaged custodial brokerage accounts for your kids and invest in anything from stocks to exchange-traded funds ETFs.
Although a custodial account will initially be in your name when you open it, your child will be able to take full control of it once he or she reaches age 18 or 21, depending on state laws. Not all accounts are created equal.
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A site with a lot of educational material might be a boon for kids who are interested in learning about investments on their own. When it comes to opening an account with an online broker, having the necessary documents ready can make the whole process much faster. Make a habit of checking their earnings and losses every few days and comparing the small fluctuations to larger long-term changes.
This will spark discussion and inspire kids to become more informed investors in the future. For some young investors, the idea of market fluctuations may be too abstract. Taking a look at this graph together could spark some conversation about risks and rewards and illustrate how valuable long-term planning is compared to shortsighted buying and selling.
After your kids gain a little more experience, it will likely be much easier for them to understand that diversifying their portfolios will help them achieve steadier growth than investing all in one stock.
Mention that index funds are an easy way to achieve this variation without having to do a lot of legwork. When your young investors have more years of experience under their belts, consider discussing more advanced investment concepts, such as options trading.
Girl holding money photo via Shutterstock.
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