A hoverboard may generate more immediate excitement, but giving shares offers potential for profits and some priceless long-term lessons.
Your kids or grandkids might want a hoverboard or a video game this Christmas. But if you haven’t gotten them one by now, it’s probably a little late for that. How about a last-minute gift of stock? Sure, it doesn’t come in a big box, and the thank you will probably be rather perfunctory. But in the long run, it’s going to be better for them than some toy that will be forgotten by February. Here are six reasons stocks are a great gift.
1. Financial literacy
Financial literacy is generally not something taught in schools, but it’s critically important. Stocks, even a single share, make the lesson tangible: A kid who owns a share of Coca-Cola can look at a soda fountain in a whole new way. Giving shares in a company can open up a discussion on how markets work and on understanding, in very real terms, that something is only worth as much as someone else is willing to pay for it. Your newspaper (if you still get a print edition) might not run stock tables anymore, but you can show the kids how to look up the value of the shares you gave them and teach them how to track an investment over time. Older kids might even be ready for lessons on more advanced concepts like dividends and price-to-earnings ratios.
2. Save on taxes
Instead of buying shares from a broker, you can give shares you already own. Depending on your tax bracket, and that of the person receiving the shares, they may be taxed at a lower rate when the recipient decides to sell. This can be very handy if, for example, you were planning to sell stock to help pay for college. Giving the stock to the student and letting them sell it could mean less paid in taxes and more money for tuition. There are some conditions on this, and tax laws are always changing, so be sure to check with an accountant or financial adviser first.
3. Delayed gratification
Warren Buffett famously says that he buys stocks that he wants to hold forever (OK, I’m paraphrasing here). Giving a stock to a child can show them the value of holding onto something before claiming the reward. As they watch the value rise, they’ll understand why it can be better to wait and take the earnings later. Of course, sometimes, stock values fall, and they’ll wish they had sold. In that case, reframe it as a lesson on when to cut your losses.
4. They can be better than bonds
Yes, there’s some inherent risk in stocks. The company could go under, and your loved one is left with nothing more than a piece of paper. But a bond left in a drawer somewhere and forgotten is nearly as useless. And the bond will, at some point, stop appreciating in value. If you stick with blue-chip companies, the potential returns could be much higher, and the shares will sometimes generate dividends. You may even consider a dividend reinvestment program (sometimes known as a DRIP). Even a single share can be placed into this sort of program, where dividends are used to buy additional shares in the company. A couple of years ago, someone found that a single, $40 share of Coca-Cola bought in 1919, would have been worth $9.8 million in 2012, had all the dividends been re-invested. This feat is not easily repeated (and you need to wait 90-odd years), but you won’t see that kind of return from a bond.
5. Don’t forget index funds
You could give a single share in a single company, but why not give a share in an index fund? If you’re looking to teach them about stocks as a concept, a single company may be easier for them to wrap their heads around. But if you’re looking to help them build a college fund or nest egg, index funds can often end up with a better return. Also, depending on the index, the kids now have a reason to track dozens or even hundreds of different companies, instead of just one.
6. It could seed a larger gift
That first share can sometimes be all you need to set up a small investment account or trust. From there, it’s easy for you to put more shares (or cash or other gifts) into the account. You might even structure it to allow the child to do a little investing of his or her own, with parental supervision, of course. And if this is last-minute, don’t worry if you don’t have time to get the account documents in order before giving the gifts, you can always do that later, before or after Jan. 1, depending on your tax situation.
Would you consider the gift of shares for your children or grandchildren? Share with us in comments below or on our Facebook page.