I’m a big fan of buying shares for minors because the experience can be particularly educational and help foster a life-long interest in investing.
Name recognition (choosing companies your kids might associate with because they buy or use the companies’ products or services) is a big part of the story. Your child’s bank, the supermarket where you shop, mobile phone provider etc can be good companies to start with in a portfolio, so when your child gets the company’s annual report and other correspondence, there will be a lot greater affinity. And as a customer, they get to sample and evaluate first-hand the services of the company they part own.
Opening a share account for a minor is getting harder because the brokers have been required to tighten their customer identification procedures. Further, many brokers have automated account opening and identification systems that just don’t allow an under 18 to operate.
While there is no law that specifically says that shares can’t be owned by minors, some companies have a clause in their constitution that prohibits the registration of shares to minors. So the ASX through CHESS has adopted this convention and prohibits direct registration to minors.
This means that in the absence of a formal trust, you have to open the account with a broker in your name, and effectively designate your child/grandchild as the beneficiary by placing their name in the account designation field.
The account will be set up, and shares registered, as follows:
Frederick John Smith Parent/grandparent
<Mary Jane Smith A/C> Child/grandchild
In law, you will be the legal owner, while the beneficial owner will be your child/grandchild. When your child turns 18, you should be able to complete an ‘off-market’ transfer that changes the ownership legally to your adult child. As there will be no change of beneficial ownership, there shouldn’t be any capital gains tax to pay.
Which shares to buy?
The starting point is to balance the size of the gift vs transaction costs (brokerage), and finding some shares that are going to be good long term performers. And hopefully, picking some companies that your child or grandchild will be able to identify with.
The minimum order size that you can place on the ASX for an initial investment is $500. However, if you are paying brokerage of $10.00 or $29.95 – this represents transaction costs of 2% or 6% respectively – a pretty big chunk. So, I suggest you try to get the parcel size up to at least $1,000.
You also want to select stocks that come from a diverse set of industries/sectors, and names that should be around in many years’ time. It is hard enough thinking about the market in the short term – so thinking about the long term where there are going to be so many up and downs probably leads to the conclusion that you stick to the major blue chip companies.
If I were feeling particularly generous this Christmas and planning to gift $5,000, I would select:
$1,000 of my child’s bank (e.g., Commonwealth Bank)
$1,000 of the company where we buy our groceries (e.g., Coles)
$1,000 of a mining or resources company (probably BHP or Woodside)
$1,000 of a telco or major online business that they may experience (e.g., Telstra, Seek, Afterpay)
$1,000 of a major health care company (probably CSL, Ramsay or Cochlear).
I make no claim that there is much “investment science” in the selection of this portfolio. However, there is some elementary diversification, they are companies my child should be able to identify with, I am confident that these companies are likely to be around in 10 years’ time and I have an expectation that they should be able to pay (in most cases) fully franked dividends.
CommSec’s share packs
Rather than do the hard work yourself, an alternative is to purchase a Share Pack from CommSec (some of you may remember these as the old ‘Aussie Shares’). CommSec share packs are available in amounts from $4,000 (minimum) to $25,000 maximum. A competitive fixed brokerage rate of $66 per share pack is charged for an online order ($181.50 by telephone).
CommSec offers 4 categories of share packs: Capital Growth, Income, Market Leaders and Tax Effective Income. Each pack comprises 6 equally weighted companies, selected by the CommSec Research team. On Friday, a $5,000 Market Leaders share pack comprised the following stocks:
CommSec Market Leaders Share Pack
These pre-mixed alternatives are easy to buy, cost effective and arguably, have a stronger element of diversification. While I can’t readily see how APA qualifies as a “market leader” and there is no resource company in the pack, let’s assume that there was some science in their construction. The downside with these packs is that the name recognition (by your child or grandchild) may not be as high.
CommSec also offers a micro-investing app, CommSec Pocket. It makes investing very accessible as the minimum investment size is just $50 and brokerage is $2. With Pocket, you can invest in 7 exchange traded funds (ETFs) – for example iShares IOZ (which tracks the S&P/ASX 200) or BetaShares NDQ (which tracks the NASDAQ 100). You can set up a regular investment plan where Pocket is on autopilot to invest an amount every month (or other period you determine). For kids and grandkids, this can be a great way to build a nest egg over time.
While investing in ETFs is good for risk diversification, they are arguably not as “educational” as individual shares. Another consideration is that you must have a Commonwealth bank account to use the app, which depending on the age of your child or grandchild, could cause some issues.
Whether you do the hard work and select individual shares, or use pre-made packs, or use a micro-investing app like Pocket, I am sure your child or grandchild will (one day) appreciate any gift of shares – no matter how large or small. Just don’t expect rapturous applause on Christmas morning because it’s not a robot or a Barbie doll!
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.