Gateway Stocks: Starting investors young
Tess Vigeland: So a few days ago when we were sitting around the newsroom talking about the Facebook IPO -- ad nauseum, by the way -- someone wondered aloud whether people might be trying to buy shares for their kids. Yeah, said one of our producers, a gateway stock! Clever.
We asked Marketplace's Jeff Tyler to outline the gains and losses of doing so.
Jeff Tyler: Here's why you might consider buying a share of stock for a child.
Sasha Burnett: When I was around eight years old, my grandpa was always listening to NPR when we were in the car, and I would hear the market updates. And I never understood what it meant. It just sounded like gibberish.
Sasha Burnett is 26 years old now. When she was a kid, she says, her grandpa bought her shares of Disney to help her understand the stock market.
Burnett: We would open up the newspaper, find the Disney stock and take a look and see -- OK, did it go down? Did it go up? And he would ask me questions about it: "Do you think it's doing well? Do you think we should keep our shares? Should we cash them out?"
Once upon a time, giving the gift of stock was common. That's how Jason Alderman was introduced to the concept.
Jason Alderman: I first got my share of General Motors when I was 10 years old -- for my 10-year-old birthday -- and back then, they issued an actual, beautiful-looking paper share. That did feel very real to me and I really did appreciate that.
Now, Alderman is senior director of financial education at Visa. He recommends parents consider using a share of stock as a teaching tool.
Alderman: When you own something, you treat it and interact with it very differently. So having a child who is able to own a share of a stock is much more real than just learning about it from a school book.
He practices what he preaches with his own family. When Visa went public, his eight-year-old son Daniel wanted his own piece of the company. But who should pay for it?
Alderman: We went back and forth -- my wife and I -- about whether we should buy that share for him or whether he should use his own money that he had made from lemonade stand sales and from allowances, to purchase the share. And in the end, we decided that it made a lot more sense to have him use his own money for it. He had a much stronger sense of ownership of it. It wasn't just free monopoly money that we were giving him. It was his money.
Using the money from his piggy bank, Daniel bought one share of Visa for $44. He held it through some ups and downs, and finally sold a couple years later for 110 bucks. And it was the child's decision.
Alderman: Help them understand the pros and cons and help them understand the choices. And let them make the choices. It may not be the choice that you would make. But having them make that choice, and even if they realize ultimately it's the wrong choice, it's still a very valuable lesson.
But not everyone agrees that a stock is appropriate for a child.
Walter Dolde: Seven- and eight-year-olds are not old enough or sophisticated enough to begin to understand economics.
Walter Dolde teaches finance at the University of Connecticut.
Dolde: The danger is -- one, it might lead kids to think that it's a casino or a video game. Or secondly, it might get them overly involved with being wealthy.
As a child, Sasha Burnett turned a profit on her Disney stock. Did it go to her head? Did she become a rich Wall Street buccaneer?
Sasha Burnett: I wish I could report that, but no. It was a fun experiment to do with my grandpa, but it's not something that I've gone back to as an individual myself.
If you decide to buy a share for a kid, you could buy it through a broker. Or you could get an old-fashioned stock certificate.
Lance Lee is CEO of a company called OneShare.com. He says, sometimes, the paper certificate becomes worth more than the stock itself.
Lance Lee: We've seen instances where the stock certificate is actually worth many times more than the stock ever was.
That's especially true for companies that went bust. Collectors covet the stock certificates for Wall Street's greatest losers; think Enron or eToys. Lee says that the value of the stock certificate for WebVan appreciated as the share price fell.
Lee: And by the time they went bankrupt, we've seen the certificate go as high as $200.
Lee says companies keep hinting that they're going to phase out paper stock certificates. Of course, that would only make the existing ones more valuable, providing one more teachable moment for a kid -- a lesson in supply and demand.
I'm Jeff Tyler for Marketplace.