Buying shares for kids: a gift that keeps on giving

It can be difficult for parents and grandparents to explain to their children the importance of long-term investment, but it is an important concept to grasp.

The Australian Securities and Investments Commission MoneySmart website conducted a survey of young people about money and found that more than half of the 15-21-year-olds surveyed would like to learn about investing, different types of investments, and possible risks and returns. In addition, almost all young people who invested at least once were concerned enough about their performance to check it regularly.

Investing in shares on your child's behalf may be one way to introduce them to investment. As well as learning about the market and how it fluctuates over the short and long term, the child can also learn about the paperwork required, like filing tax returns, and follow the progress of the companies they are investing in.

What to do first

In order to start a share portfolio, you can invest as little as $500. Then, you could top it up every year or so with further investments with the help of online trading platforms.

Choosing which shares to buy depends on your investment budget and perhaps the interests of your child.

Exchange traded funds (ETFs) provide better diversification by investing in dozens of companies, bonds, commodities, or themes, providing a more diversified portfolio if the initial investment is relatively small. If you need help with this there are Sydney financial planners that can help you understand more (or any other city or town you might live).

ETFs are available in Australian and international shares; different sectors of the share market, such as mining; precious metals and commodities, such as gold; foreign and crypto currencies; and fixed interest investments, such as bonds. You can also invest in themes such as sustainability or market sectors such as video games that may appeal to young people.

As an alternative, you can help keep your child interested in the stock market by purchasing shares in a company they strongly identify with, such as a pizza delivery firm, a surf brand, or a toy manufacturer.

Is it better to buy in your name or in theirs?

The child cannot own shares in their own right, so you may want to buy them in your name and transfer them when they turn 18. Nevertheless, you will have to pay capital gains tax (CGT) on any profits you make and your investment will be considered when filing your tax return. If you need more information on this, contact your Sydney financial planners (or planners from your local area) to learn more.

It is also possible to purchase shares for the child in trust. Though you are the legal owner, the child is the beneficial owner, so you won't have to pay capital gains tax when the child turns 18. To set up a trust account for a minor, you'll need to follow some simple steps on your online trading platform.

Additionally, there is some annual tax paperwork to deal with.

You can apply for a tax file number (TFN) for the child and quote it when buying the shares. It is important to note that you must file a tax return for the child if the shares earn more than $416 in a year. If you don't, 47 percent of the unfranked dividend income will be withheld as pay as you go tax.

Slow and steady wins the race

You could consider playing the ASX sharemarket game if you are not quite ready to invest cash, but want to help your children understand share investing.

Participants invest $50,000 in virtual cash in the S&P/ASX200, a range of ETFs, and companies. Individuals or groups can participate, and prizes are available.

There is also a federal government money-managed website, which is designed for teens and provides a thorough grounding in savings and investing.

It’s also a good idea to introduce children to the idea of Sydney financial planners and their services (or whatever other city you live in). The more they understand about the advice available to them, the better for them long term.

Oracle Advisory is a leading independent wealth advisory firms. Our advisers have been helping Australians realise their financial potential since 1986.