Helping children have a share in stocks

Personal Finance

January 23, 2000|By Eileen Ambrose

RYAN MELIKER OF Ellicott City rattles off the reasons he became a Disney investor last year, including the company's ownership of ABC, ESPN, the Anaheim Mighty Ducks hockey team, theme parks and movies.

Recently, he jumped on the Internet bandwagon and bought America Online, although he was leaning toward Sony Corp. because of its wide holdings and quality products. Next year, he may buy Microsoft.

Ryan is 9.

"I always wanted to own part of a company," says the fourth-grader, who bought the stocks with his sister Shayna, 10, and brother Joshua, 6.

Their father had told them that by investing in companies, they could wind up with even more money if the businesses grew and succeeded. "I thought I could help them with that," says Ryan, who with his siblings views the investments as potential college tuition.

For parents Ron and Wendy Meliker, the stock is just another step in an important life lesson: how to save.

It's a lesson badly needed by many Americans, young and old, experts say. Studies find that many Americans don't understand financial and economic basics. Bankruptcies are high despite a booming economy.

And knowing how to save and invest will become even more important for younger generations.

"Social Security is probably not going to be in the same shape and form as it is today when these children retire," says Morry Zolet, a senior vice president with Ferris, Baker Watts Inc. in Baltimore.

Zolet says more stock is being bought on behalf of youngsters. "It teaches them the discipline of how wealth is created by buying good companies and letting them build and split over the years," he says. A good time to buy stock for children to teach them about investing is when they are about 10 and have developed some math skills, experts say.

Children can't set up an account with a broker and buy and sell stocks on their own. Parents can buy stock in their own name and turn it over to a child later.

Or, if they want to buy stock in the child's name, they must place the shares in a custodial account, which in this state is called a Maryland Uniform Transfers to Minors Act account. Parents will have control of the account until the child reaches 21.

One advantage to a custodial account is that the income earned on its assets is generally taxed at the child's lower tax rate. A drawback is that children with assets are likely to get less financial aid for college. And once children are of age, they have complete control over how the assets are spent.

"If the Ferrari looks more attractive than college, it's very difficult for you to do anything," says Neale Godfrey, author of "Neale Godfrey's Ultimate Kids' Money Book."

Many experts recommend buying stocks in companies children may have an interest in or whose products they use, such as McDonald's Corp., Nike Inc. or Coca-Cola Co. But just because kids know of a company doesn't mean it's a good investment, Godfrey said. She advises buying the best companies and teaching kids about them if the businesses are unfamiliar.

The author also recommends that parents explain that the purpose of investing is to achieve some long-term goal, such as paying for college or building a retirement nest egg, and not to make a quick buck.

"They hear about hot stocks, up 80 percent, dot-com and sexy, sexy, sexy. That's not what it's about," Godfrey says. "There are more losers than winners. You don't want to instill the idea that this is betting or gambling or the lottery."

That's what Triadelphia Ridge Elementary School teacher Kevin Mulroe says he tries to teach children. Mulroe developed a stock market game to help sharpen the math skills of his fifth-graders in Ellicott City. The children invest an imaginary $100,000 in stocks, track their performance, learn financial terms and are allowed to trade twice during four months. And they get a lesson on the stock market crash of 1929, the catalyst to the Great Depression.

Mulroe advises parents to avoid buying high-risk stocks for children. "If you lose the money, all of a sudden kids have negative attitudes about investing. You don't want to do that," he says.

The Melikers' lesson on investing started with learning how to save their allowance. Some of the money goes to charity. Some goes into a savings account with the parents matching $2 for every $1 saved. The rest the kids can spend as they like.

After a year, the three children saved a total of $1,000. The next step: investing.

The three children decide which stock to buy each year, although their father advised that they consider companies they like and where the family spends money.

"If they were going to pick Hechinger's six months ago, I would have said, `Let's reconsider this,' " says Ron Meliker, referring to the bankrupt home-improvement retailer.

The children were warned that they could lose money in the market as well as make some. Shayna acknowledges that she was a little worried about their investment after learning about the Depression in school.

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