Online Trading for Kids

Read how young adults are turning their computer hobby into a money making proposition, by investing and trading online.
Table of contents

In this article, you will find:

How to set up an online trading account

Online Trading for Kids

Kids with an interest in computers and computer games probably read PC, Wired, EM2, and similar magazines. They see people in their 20s who were formerly called geeks but now are creating the fastest-growing Internet companies. Kids also see how these companies have gone public and have made these young owners instant millionaires. So, the idea of the stock market isn't an unfamiliar one to many kids. In fact, Wired has started tracking its own stock index made up of many so-called tech stocks, such as Dell Computer and AOL, but also stocks for the next century as well, including Walt Disney, Sony, and Wal-Mart. Ask a young subscriber, and he's probably familiar with these companies—he may even follow the ups and downs of the index in the magazine each month.

Kids today are now using computers for two key investment activities:

  • Making trades. The process is quick and direct, and the commissions for online trading are less than those charged for making conventional trades. For example, Charles Schwab charges less for its online trades than it does for its conventional discount brokerage trades. Some online firms, such as Ameritrade, charge a flat, modest fee no matter how many shares are purchased or at what price. Online trading isn't limited to stocks, either: It's also possible to buy mutual funds, bonds, and other types of securities online.
  • Tracking investments. Dozens of resources out there make things easily accessible and cheap. For example, instead of paying a subscription to a financial newspaper, much of the same information can be found on the Web for free.
Financial Building Blocks

It has been estimated that at least 5 million ordinary people (non-professionals) trade online at least once and a while, and the Securities and Exchange Commission anticipates that the amount of online trading will double in 1999. Given the reduced commissions charged on such online trading, it can be expected that this activity will increase as people become more comfortable with the privacy protections for online trading.

Starting at a young age to use the computer for investment activities is a smart way to start a beneficial lifelong habit. For example, a high school child who's used to looking up stocks on the Internet can easily continue to track his portfolio when he goes off to college.

Mechanics of Online Trading

Kids can buy and sell stocks online in the same way as adults can. They can use E*TRADE, Charles Schwab Online, or many other companies offering online trading. The only catch: For children under 18, the account must be set up as a custodial account, and unlike regular accounts, custodial accounts generally can't be opened online. Instead, you must request an account form (which you can do online) and then submit it by mail.

Piggybank on It

If you and your child want to do online trading, make sure that you understand the technology. Read up on all the information that the online brokerage firm provides.

Watch Your Step

High volume trading can delay the execution of your order and cause the price that you ultimately pay to be radically different from what you expected. Instead of a market order, which means you'll pay whatever price the stock is trading at when your order is executed, consider using a limit order, which means you'll buy at a price you specify or one that's even lower.

Custodial accounts are supposed to be managed by the custodian (typically that's you, the parent). Customer agreements state that only an account holder of legal age will trade online. As a practical matter, however, once the online account is in place, there's no real mechanism to prevent the kids from doing their own trading. (A broker talking to an investor won't take an order from a minor, but the computer doesn't know the age of the person who's imputing the information.) It remains to be seen whether the industry will put any controls in place to prevent direct trading by minors. For example, what happens if your 12-year-old puts in an order to buy 10,000 shares of stock in his custodial account for $1 million and then the price of the stock tumbles to half of what it was when the order was executed? Who's left holding the bag?

Without industry controls in place to prevent online trading by minors, it's up to you as a parent to monitor your child's activities. You can't help but see articles from time to time in your local newspaper about how a 15-year-old has made millions by trading online. But that's the exception (that's why it's newsworthy). Your job is to provide necessary controls on what's otherwise a very easy investing process. Here are some of the strategies you can use to avoid online trading catastrophes:

  • Discuss all proposed trades that your child wants to make. You wouldn't do otherwise if you were dealing directly with a broker, so why should it be any different with online trading?
  • Set up procedures in your home for making trades. For example, you may insist that only you submit orders to buy or sell (while allowing your child to monitor investments online). Or, you may have a set time each evening that you sit down with your child in front of the computer to make any trades.

Once the account is in place, a child can decide what to buy or sell. There's no broker making specific investment suggestions, so it's up to you and your child to make the stock picks. However, the same fundamentals used in investing in the conventional way (explained in The Rewards of Stock Market Investment) apply with equal force to online trading.

  • Know what you're buying. Understand the risks and potential rewards of your choices.
  • Take a long-term view. Don't let the ease of the online investment method spur you to make foolish decisions.