How Can I Give The Gift Of Stock?
New services are coming out to help you give the gift of stock. There are pros and cons to the new offerings, but they aren’t the only options. Here are some other “old time” and newer ways you can give the gift of stock. I recently wrote an article, that led to a CBS television interview, about a new company called Stockpile that is selling gift cards in retail stores that can be used by the recipient to buy stock. There’s also a similar service called SparkGift that is based totally online. The goal of each is to make giving the gift of stock easier, which they achieve in many ways. However, there are drawbacks to each and while they bring the idea of giving the gift of stock front and center (and, in the case of Stockpile, directly to Main Street), they are not the only way to do it. Here are some other ways for you to consider giving what can be a life-altering gift this holiday season. The new Stockpile and SparkGift are both new services that allow you to buy what amounts to a gift certificate for the recipient to open up a brokerage account and buy stock. Stockpile is a more flexible platform, allowing the recipient to buy a different stock or to not buy stock at all, opting instead to put the cash toward a gift card to a retailer. SparkGift requires the gift to be used for investment or the money goes back to the gift giver. At a base level they are both good ideas, particularly because the gifts can be for very small amounts — as low as $20. However, both come with notable costs. For example, a $25 gift card from Stockpile bought at a brick and mortar store with set you back $4.95. The online version of the same gift will cost you $2.99 plus 3% of the gift value. SparkGift’s online-only service charges $2.95 plus 3%. For a small gift, that’s a big cost percentage-wise. And for Stockpile, you may not like the idea that the gift recipient can switch out to a retail gift card (note that a minor would need parental approval for this). In both cases, a big thing to keep in mind is that neither service is actually selling stock. They are selling gift cards and gift certificates with a cash value that can then be used to open a brokerage account to buy stock. So regardless of the stock you pick, the person to whom you are giving the gift doesn’t own the stock until they open a brokerage account and buy it. In the end, I think the drawbacks of these services limit their value. You might believe otherwise and I’d encourage you to look into them more deeply if you are considering making the gift of stock. But take the time to understand the good and the bad… and the costs for you and the person receiving the gift. What I did If these don’t suit your fancy, however, what are the other options? I’ve written previously about the low-cost variable annuity I created for my daughter. That required a much larger financial commitment and was more time-consuming and complicated than either of the services above. However, the only cost was time and effort to understand the product I was getting. And since I went through Vanguard, there was a lot of hand holding, which made the process much easier. Why did I go this route? First, I was able to create a broadly diversified portfolio that rebalances automatically every year. Second, a variable annuity is, essentially, a mutual fund wrapped in an insurance contract so the money can avoid taxation while it grows. Third, because it’s an insurance product, it has limits on what can be done with it — the most important to me was a penalty for withdrawing the money before retirement age. Why is that good? If, goodness forbid, my daughter is in dire need of money she can get it. But there’s a huge incentive to leave it in place. A low-cost variable annuity isn’t the right gift idea for everyone, but if you are thinking about giving the gift of stock, I urge you to at least consider it. You could even pool money with other relatives to get it started if you needed to. And even if you don’t use Vanguard, their website has lots of educational information for you to start your research. But this is far from the only option available to you. Buy a share, direct One of the oldest ways to give the gift of stock is to go directly through a company’s dividend reinvestment plan, colloquially known as a DRIP. Although many of these plans require that you own stock before you get into the plan, there’s a large number of companies that will allow you to buy stock directly, often called direct purchase plans or DSPs. You can see a list of such companies at Computershare.com . The companies on this list include names you’ve heard of like McDonald’s (NYSE: MCD ) and names you may not have, like closed-end fund Aberdeen Asia Pacific Income Fund (NYSEMKT: FAX ). Each plan is different, so you’ll need to take the time to read about the one you are interested in. But some can be cheap to get into. For example, McDonald’s direct stock purchase plan has a minimum of $100 if you are setting up the account for a child. There are transaction costs for this, including a $5 set-up fee and trading costs if you add more money (the cost varies based on the type transaction: one-time investments are $5, recurring investments are $1.50, and payroll deductions are free). So it isn’t a no-cost option, but it does create a different kind of relationship between the recipient and the company, which you may find desirable. Indeed, if you believe buying a share of stock should be looked at the same way as buying the entire company, a DRIP makes the commitment that much more material. Perhaps more interesting, if you set this program up for yourself (that requires a $500 minimum), McDonald’s will allow you to gift shares from your account to others at no cost. Give what you own Which brings up another option: gift some of the shares you own to someone through your broker. Most brokers will do it, though there will likely be costs involved. But this is a time-tested method for giving the gift of stock. The recipient will, of course, have to have a brokerage account. You could also ask to have a stock certificate issued in someone’s name. This is really old school and some companies, like Disney (NYSE: DIS ) don’t do the whole stock certificate thing anymore. That’s a shame since this is a tailor-made stock gift for a child and it’s kind of a neat idea to have a stock certificate hanging on a wall. But if you like the idea of handing someone a physical stock certificate, it’s worth calling your broker to find out more about this option. That said, there are costs involved with doing this, and, as noted with Disney, it won’t be an option with every company. But it is, at the very least, worth the homework if you think the idea sounds good. If you don’t have a brokerage relationship or simply want a different option for this approach, take a look at a service like Give a Share . This service lets you buy one share of stock to be given as a physical stock certificate. Be forewarned, however, it’s not cheap, especially if you opt for a frame. UGMA One issue that I’ve kind of glassed over is the child versus adult recipient. To be honest, you could just open a brokerage account for an adult or a child if you wanted to, and sidestep all of these other services. Some brokers don’t require minimums and offer cheap or free trades. In fact, for most of the above options you are setting up a brokerage relationship anyway. For adults the process is pretty simple, since they are old enough to handle their own affairs. They just need to provide some basic identification information. For a child, however, you’ll need to set up a uniform gift to minors account. It isn’t hard to do, but it sets up someone as a custodian to handle the account for the child until the child is old enough to manage the account themselves (usually 18). The norm is for the parent or guardian to be named on the account, so you’ll basically need to enlist another person to get a stock gift to a child done. (Children receiving a Stockpile or GiftSpark gift will need to get a parent to complete the process, too, just for reference.) There are tax issues with gifts to children you’ll want to be aware of, as well. You’ll want to check with your accountant or warn the parent of a minor to whom you’ve given a gift, but, generally speaking, a minor avoids taxation on a certain amount of income before the parent has to start reporting any income from the investment on his or her tax return. (Gift giving itself has limits, too, which you’ll want to consider, but they are well beyond the small gifts being discussed here unless you are giving Berkshire Hathaway A (NYSE: BRK.A )(NYSE: BRK.B ) shares away.) I mention these things explicitly because some people just don’t get finance. As soon as you mention money, their eyes glass over and they go to a safe place in their minds. If the person you are giving a stock gift to is like this or if the parent of the child you are giving a stock gift to is like this, you’ll want to strongly consider what you are asking of them. You could be setting up a disaster. Other “middle men” worth looking at There are also some other options to consider to get someone older started on investing. I use Loyal3 for a “family” account in which my wife, daughter, and I came up with five stocks that we buy in small increments each month. Although it isn’t a constant conversation, we frequently talk about the stocks we own. You can also use a similar service called Robin Hood . Robin Hood is a cute name because Loyal3 and Robin Hood provide free trades. Yes, you read that correctly. How do they do that? By combining your trades with others to create large batches. That said, there are fees associated with either of these services if you want to move beyond their basic set of tools. And they have some limits that you wouldn’t find with a regular brokerage account. Loyal3, for example, limits your investment choices to a relatively small list of well-known companies. But if you are looking for an autopilot option and only need basic services, both are very cheap and easy ways to go. The problem is that both services are meant for adults. However, they are specifically designed for small regular purchases and ease of use. In other words, if you started a young adult (perhaps someone who just got their first job after college) off with this type of account, you may be able to get them to start dollar cost averaging at a young age. A healthy habit and at no cost. So these may be the best bet for someone you know who is just starting out in the world. Giving the gift of stock If you are fortunate enough to understand the value of investing, I’d argue that it is almost incumbent upon you to share that knowledge. But because financial products are involved, it isn’t an easy process if you want to do more than just educate someone with words. New services like Stockpile and Loyal3 have removed layers of complication, but there are trade-offs. Still, don’t forget that some of the “old” ways of giving a stock gift can have side benefits, despite their limitations and, often, added costs. Sidestepping stock altogether, as I have done with a variable annuity, may turn out to be a good choice, too, if you want to make sure the idea of investing doesn’t mean your gift sits unappreciated and unattended. In the end, investing isn’t easy. And while setting people set up to invest is getting easier, there are still a lot of things to consider. Yes, you could buy a Stockpile gift card and pray for the best. But you could also just open a brokerage account, or give a physical stock certificate, or even set up a variable annuity to run on “autopilot.” Just take a moment to consider all the options before jumping at what seems like a great idea, because you may find choices that suit your needs, and the needs of the gift recipient, better than the new options making the news today.