Gift-giving made practical

I'll preface this by saying that I love the holidays, and gift-giving. It's a treasured tradition and I put much thought and effort into finding my loved ones that special something, all nicely wrapped and ready to be opened.

I've never approached gift-giving as a practical endeavour, so it took me aback when a relative told me that she was going to give her kids stock this year as a gift. Her reasoning was that she didn't know what to buy them, they didn't need any more gadgets, and most importantly, she wanted her gift to last, to add value.

It wouldn't have been my first choice, but when I thought about it, it made perfect sense. Buying stock for children, grown or otherwise, can be an educational opportunity that will expose them to a new world and, hopefully, keep on giving for years to come. When you look at it that way, it's actually an ideal gift.

If giving stocks for the first time to older or adult kids, or grandkids, pick stocks of companies that are aligned to who they are as consumers and consider supplementing the gift with your favourite investing book or subscription to a business magazine.

You might also want to explore apps they can download on their smartphones that would help them keep track of the stock price. Watching how the stock price fluctuates and what sorts of events or news makes this happen will help them stay interested. It's a good way to get them thinking about their favourite brands from a shareholder's perspective and it will hopefully encourage them to expand their investment knowledge.

To make the most of the gift, you may also want to suggest they open a direct-trading cash account or RSP account at a discount brokerage so they can continue to purchase stocks as part of their longer-term financial goals. Encourage them to start small and work their way up as they build confidence. Online brokerages usually have useful tools to help novice investors learn the ropes of managing their own portfolio.

This, of course, is qualified by the need to diversify your investments. Owning just one stock puts you at risk if your entire portfolio is hanging off the strength of your one holding. You might feel more comfortable buying your kids a professionally managed mutual fund if they're literally just starting out. Set up a monthly contribution plan into a portfolio of well-diversified, blue-chip companies. Once they build up enough of an asset base, at that point it may make sense to start buying individual holdings.

While it's never too late to help your kids navigate the world of investing, it's best to set the foundation of financial literacy when they're young. Equities may be a good option, even for younger kids. Children identify with brands at an early age, and their favourite toys, movies and food are all possibilities for stocks. Think about big brands like Apple, McDonald's, Nintendo or Walt Disney. Kid-friendly companies have colourful stock certificates with images children can relate to. For example, certificated shares of DreamWorks feature Shrek on them. Bottom line, if your child can identify with the company, they are much more likely to be interested in the investment.

As a memento, you can have a stock certificate framed and displayed in your child's room as a badge of honour that he or she is a shareholder. Above all, use this gift as an opportunity to teach your kids about saving and investing. Follow the progress of your children's stocks, show them the stock quotes in the newspaper and discuss their investments with them.

Actually buying a physical stock certificate takes some time, so start now if you want to have the certificates arrive in time for the holidays. Place the trade in your own brokerage account so that you can buy the shares you want. After you order them, advise your brokerage that you need them in certificate form. Each brokerage has varying policies, so make sure you understand the total cost implication of purchasing shares. Fees of $50 per certificate and $150 for a rush order may be common. Regular trade commissions will also apply for the original purchase.

If you buy a dividend-paying stock, quarterly dividends will be paid as long as the company is in a position to do so. If it is a dividend-paying company, you may want to consider a dividend reinvestment plan, or DRIP. With a DRIP, dividends are put toward the cost of buying more shares. The net result is that your gift recipient is steadily acquiring new shares over time. Many DRIPs allow for the purchase of fractional shares, which is ideal for investors with only a few shares to generate dividend payments.

Keep in mind that gifting to adult children can be an efficient income-splitting strategy. However, you have to be aware of the potential tax consequences. Generally speaking, there would be no attribution of any income or capital gains back to you when you gift investments to an adult child, unless it is strictly to reduce your income. But for minor children, while most investment income would be attributed back to you, there should be no attribution of capital gains. You should be aware that since a gift is also a disposition of the investments for tax purposes, you should calculate the potential tax cost before carrying out a gifting strategy with appreciated assets.

When it comes to the holidays, it's easy to get caught up in our time-honoured notions of gift-giving. But buying stock for children and grandchildren is a smart and valuable way to break from tradition.