How to Buy Stocks for Kids
Children can buy and own stocks through a custodial brokerage account opened by an adult. Although they will still be minors, any capital gains that they realize from the sale of stock or income they get from dividends or bond yields will be subject to taxation. Once they turn 18, the custodial accounts can be transferred to them.
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Instructions
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Contact your stock broker or brokerage firm and inquire about custodial account services. Minors are not legally allowed to sign contracts alone. An adult, usually a parent or other family member, must co-sign to open up the brokerage account.
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Use the funds in the brokerage account to purchase stocks. Once the account is open, there are no restrictions on what stocks, options or bonds can be purchased. As few children have the time to manage their portfolio constantly, long-term, low risk investments are generally the best choice for children.
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Teach children how to monitor their portfolio and to buy and sell stocks. The ease of use of online stock trading platforms makes it so that even young children can get some hands on experience trading stocks. The educational aspect of buying stocks for children will be greatly enhanced by giving them the responsibility of handling their investments.
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Track tax liabilities. If the children make more than $15,000 in capital gains, they will have to pay income tax. Even if they do not, they will need to file 1099 forms with the IRS. For convenience, most parents will find it much easier to jointly file their returns with their children.
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Transfer the custodial account to the children when they reach the age of majority. Consider transferring the money that they made in their custodial brokerage account to a 529 educational account. This will help them pay for tuition and save on their taxes, at least initially (see Resources below).
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