Kids today are now using computers for two key investment activities:
Making trades. The process is quick and direct, and the commissions for online trading are less than those charged for making conventional trades. For example, Charles Schwab charges less for its online trades than it does for its conventional discount brokerage trades. Some online firms, such as Ameritrade, charge a flat, modest fee no matter how many shares are purchased or at what price. Online trading isn’t limited to stocks, either: It’s also possible to buy mutual funds, bonds, and other types of securities online. Tracking investments. Dozens of resources out there make things easily accessible and cheap. For example, instead of paying a subscription to a financial newspaper, much of the same information can be found on the Web for free.
Starting at a young age to use the computer for investment activities is a smart way to start a beneficial lifelong habit. For example, a high school child who’s used to looking up stocks on the Internet can easily continue to track his portfolio when he goes off to college.
Mechanics of Online Trading
Kids can buy and sell stocks online in the same way as adults can. They can use E*TRADE, Charles Schwab Online, or many other companies offering online trading. The only catch: For children under 18, the account must be set up as a custodial account, and unlike regular accounts, custodial accounts generally can’t be opened online. Instead, you must request an account form (which you can do online) and then submit it by mail. Custodial accounts are supposed to be managed by the custodian (typically that’s you, the parent). Customer agreements state that only an account holder of legal age will trade online. As a practical matter, however, once the online account is in place, there’s no real mechanism to prevent the kids from doing their own trading. (A broker talking to an investor won’t take an order from a minor, but the computer doesn’t know the age of the person who’s imputing the information.) It remains to be seen whether the industry will put any controls in place to prevent direct trading by minors. For example, what happens if your 12-year-old puts in an order to buy 10,000 shares of stock in his custodial account for $1 million and then the price of the stock tumbles to half of what it was when the order was executed? Who’s left holding the bag? Without industry controls in place to prevent online trading by minors, it’s up to you as a parent to monitor your child’s activities. You can’t help but see articles from time to time in your local newspaper about how a 15-year-old has made millions by trading online. But that’s the exception (that’s why it’s newsworthy). Your job is to provide necessary controls on what’s otherwise a very easy investing process. Here are some of the strategies you can use to avoid online trading catastrophes:
Discuss all proposed trades that your child wants to make. You wouldn’t do otherwise if you were dealing directly with a broker, so why should it be any different with online trading? Set up procedures in your home for making trades. For example, you may insist that only you submit orders to buy or sell (while allowing your child to monitor investments online). Or, you may have a set time each evening that you sit down with your child in front of the computer to make any trades.
Once the account is in place, a child can decide what to buy or sell. There’s no broker making specific investment suggestions, so it’s up to you and your child to make the stock picks. However, the same fundamentals used in investing in the conventional way (explained in The Rewards of Stock Market Investment) apply with equal force to online trading.
Know what you’re buying. Understand the risks and potential rewards of your choices. Take a long-term view. Don’t let the ease of the online investment method spur you to make foolish decisions.
