I would like to start investing in shares for my 10-year-old grandson with the view of him eventually making the decisions when he becomes an adult.Wh
I would like to start investing in shares for my 10-year-old grandson with the view of him eventually making the decisions when he becomes an adult.
What type of account should I use and are there any rules around investing for children?
What is the best way to do this – should I use a company or do this myself through a DIY investing platform?
Teaching children about investing is one of the best things you can do for the next generation
Jayna Rana, This is Money, replies: It is a wonderful thing that you want to start investing for your grandson.
Getting started – and interested – in investing as early as possible could help build two vital investor skills: time and patience.
The more time you have, the more contributions you can make and the more time your money has to go further.
It is also good to hear you want your grandson to play an active role in the investment plans you have for him.
I wished I learned about investing when I was at school so I could understand the importance of it and get started as soon as possible.
Getting children interested in investing at a young age is one of the most important things you can do for the next generation.
You said that you wanted to buy shares for him and try to get him involved in picking them, so below we have some ideas on the cheapest and easiest places to do that if you are investing a relatively small sum to get his interest going.
You could do this in his name, with a Junior Isa or Junior investment account, with a DIY investing platform that offers one.
Alternatively, if you want to make things really simple and put some cash into an account he can use with you, then you could open a DIY investing platform account or sign up to an app that offers free share dealing in your name and let your grandson operate it with you when you are together.
If you are considering investing larger sums and are more interested in growing his wealth than piquing his interest, then you may decide it is a better option to go down the route of opening a Junior Isa or account in his name and perhaps investing in funds, investment trusts, or low cost tracker ETFs.
Adrian Lowcock, head of personal investing at Willis Owen, says: When investing for someone else it is important to set out the objectives clearly at the outset.
This, to begin with, will be what do you want to achieve with the money, and should cover both the learning objectives you want your grandchild to get from investing as well as what you want the money to be used for.
A big part of this is teaching children the responsibility of making their own investment decisions and the impact they have on the value of the investments.
The first decision is how to hold the money. You could keep the money in your name and tell the child that it is intended for them.
Junior Isas have the same tax benefits as an adult Isa and automatically become one when the child turns 18.
Up to £9,000 per year can be paid in and they must be opened by a parent or guardian.
A child over 16 can open a normal adult Isa, though they can only open an adult stocks & shares Isa or Lifetime Isa when they are 18.
The benefits of a Junior Isa over a standard account in your name is that the money is the child’s and can grow tax-free.
The risk is they decide to cash in at 18 and spend it on something the money was never intended for.
Naturally a Jisa with a large sum of money in it at 18 might make some parents and grandparents uncomfortable.
This is where education and teaching children responsibility comes in.
This does mean the gains and income are all part of your finances and not the child’s, but gives you full control over the money.
Junior Isas are another option and mean the money is the child’s name although they cannot make any investment decisions until they are 16, nor access the money until they are 18.
The parent or guardian will have to open the account and has control.
Next you need to decide on how much risk you should be taking.
Risk is really determined by three factors – personal attitude to risk, time and the financial target.
The goals help determine the last two. Personal attitude is best achieved through conversations with the individual.
It will be hard to get a realistic attitude to risk for a child, so the adult investing will likely need to lead, explain what the money is for and why it is or isn’t appropriate to take risks.
This is where experience could really help. At the beginning the decisions are likely to be yours and not the child’s, but it is really important to involve them and get them to contribute, ask questions.
There is nothing to stop the child making the investment decisions themselves – although this will most likely have to be executed by a supervising adult (unless you want to hand over your passwords).
How to invest and what in?
Ideas to interest a child in investing
One way to encourage a child to engage with individual companies is to explore the world around you – and consider the companies behind the things we buy, writes Simon Lambert.
A conversation with a child about their favourite things, where they come from, who makes or provides them and whether they are becoming increasingly popular, can get them thinking about companies.
You can then explain to them whether those companies are doing well or badly – and if they are popular with investors and why.
When lockdown rules permit, you could also head out for a walk and observe the world around us – discussing all the companies that lie behind our consumer economy.
You could also ask them what things they are looking forward to doing after lockdown, such as going to the cinema, going bowling or going on holiday.
Explain how companies that provide goods or services limited by the rules have suffered and ask if they think that means they will do well when things reopen.
If you are happy to make buying some shares a experimental portfolio, where mistakes are not a problem and not too much money is invested, you could let these conversations lead the way on what you buy.
Or why not have it that you pick five shares each, put them in a portfolio in a free share trading app, and see who does best.
An alternative way to get started is to open one of This is Money’s free Power Portfolio accounts, where you can either track your real life investments or build a practice portfolio.
Jayna Rana, This is Money, adds: For children, or anyone that doesn’t know a lot about investing, buying shares can be a great idea because they are more relatable.
If you don’t use Amazon or Facebook, you’ve at least heard of them and know what they do so are more inclined to investing in these types of names than funds.
It’s important to do some reading around each company and not to jump head first into one just because you recognise the name, but it can make investing more fun and interesting when you do.
Investing in individual company shares – as you suggest that you want to do – brings a heightened and more direct interest in what is being backed.
On the other hand, funds and trusts are good for diversification, as they will be made up of a portfolio of shares, plus you have the expertise of a fund manager making the decisions for you.
Ultimately, the choice is yours and it may be that the sum of money being put in and the intention matters: where on the spectrum between kickstarting an interest in investing and getting good performance from investments does it lie?
As for how to invest, having a fund manager picking investments also has it pros and cons.
This makes sense if there isn’t a confident investor in the house who can support and have conversations about different investments.
But the downside is that much of the decisions will be taken by a third party and it might not always be clear or obvious what those decisions are.
There are other options to picking individual funds and investment trusts too, such as making use of starter portfolios to help build a diversified portfolio.
There are many to be found and you can use them at DIY investing platforms, such as Hargreaves Lansdown, AJ Bell, Fidelity or Interactive Investor.
If it is individual share investing that you want, then you should try to build up a portfolio of companies – with enough to diversify and not have all your eggs in one basket, but not so many different stocks that it is hard to keep track of. Read our guide: How many shares do you need to diversify a portfolio?
Other than actually picking the shares – which we have some ideas to help with in the box above – you also need to consider costs.
While some traditional DIY investing platforms offer free fund dealing, they charge for buying and selling shares. You can find out more about DIY investing platform fees and charges in our guide.
Bear in mind share dealing charges with the major DIY investing platforms will be between about £8 and £12. Buy ten different company shares for a portfolio and that soon adds up.
If you want to invest a relatively small amount and not have the money eaten up by dealing fees then consider one of the new breed of apps that offer free share trading, such as Trading 212, Freetrade or eToro.
Compiling a portfolio of shares held in your name for your grandson here will be substantially more cost effective, just make sure that you only sign up for share dealing and not any high-risk CFD trading.
Adrian Lowcock adds: The right route is also dependent on your objectives – if the purpose is to get the child to understand the importance and into the habit of investing, then a company managing the money would still work.
Willis Owen’s Adrian Lowcock shares his tips on teaching children about investing
If you want to try and get them actively involved, then it makes sense to take control of the decisions.
Whatever route you take there are some simple things that will help them learn:
- Make sure they are involved in the decisions
- Regularly report back to them – probably at least monthly
- Consider regular savings so they can see the benefit of adding money, little and often.
- Explain what has happened and why. As time progress this will expand out to dividends, compounding, economics, politics
- Talk about some of the companies they invest in – but make it relevant. Explain why you hold a company and why its done well or poor.
- Be patient and answer all questions
Podcast: How to start investing
Over the long-term investing in the stock market has proven to be the best way to beat inflation and grow your wealth.
But how do you know when the time is right to start? What are the things to consider when working out what investments might suit you? And do you need to wait until you are wealthy before you become an investor?
In this special This is Money podcast, Simon Lambert is joined by Rob Morgan, of Charles Stanley Direct, to help listeners through the investing maze and give them an easy to understand guide to getting started investing