Shares of Stocks or Mutual Funds You Currently Own
Giving shares of stock or mutual funds can be a good tool to learn about investing, especially if it involves a company that makes products your child uses and enjoys. The best way to do this is to give your child shares of appreciated stock or mutual funds that you already own. When they later sell the shares, the gains could be taxed at their lower capital gains rate (five or 10 percent) versus the parent's higher rate (currently 15 percent).
Brokerage Accounts for Minors
If you want the shares of stock or a mutual fund to be owned in a brokerage account, then you'll need to open a special type of account called a UTMA or UGMA account, where the parent is the custodian and the child is the beneficial owner. When the child reaches age 18 (or 21, depending on your states laws pertaining to UTMA accounts), then the account can be converted to sole ownership in the child's name.
Another option is to consider a gift of a few shares of companies such as Apple or McDonald's. These shares can be a good complement to gift cards from these companies.
Check out several services such as Oneshare and Shareinaframe. For about $40 to $80, plus the price of the stock, these companies will prepare a matted and engraved setting to frame the stock certificate of your choosing. You can give a colorful stock certificate in frame, which makes for a great presentation to hang on the wall. The idea is that this will inspire a youngster's interest in investing. The child can be the registered owner on the stock certificate where the parent is also named as the custodian, so no brokerage account is required.
Unlike other securities, children under age 18 can own individual U.S. Savings Bonds as long as they have a Social Security number. Savings Bonds are safe, easy to understand and interest earned can be tax-free when the bonds are redeemed and the proceeds are used to pay for qualified higher education expenses. For these reasons, some folks still like to buy and give Savings Bonds as gifts to children.
You can buy US Savings Bonds online which is a better option because when you give a paper savings bond as a gift, you may not get the bond in time to present it. Instead, on the savings bond web site, you can personalize and print a gift certificate, which makes for a nice presentation of the gift.
But the current interest rate for Series EE Savings Bonds is a pitiful 0.6 percent. The fixed rate for inflation indexed Savings Bonds, called Series I Savings Bonds is ZERO percent and the inflation rate recently announced in the beginning of November is 0.37 percent. Of course, these rates can change and rise as interest rates and inflation rises. It's just hard to wrap my brain around why anyone would want to buy Savings Bonds at the current rates.