If you asked a group of parents about the best present to give at a baby shower, I'd imagine that a brokerage account wouldn't rank among the top responses. Yet if you really want to get your children or grandchildren started on the right foot, opening a brokerage account for them could be the best gift they ever receive.

Running to stay even
Lately, many people worry about the damage that the current economic turmoil may inflict on future generations. With trillions in spending on government programs to shore up the economy that have yet to bear fruit, the burden of repaying that debt may force our children and grandchildren to make the tough choices we've refused to make ourselves.

With those concerns in mind, the best remedy to protect your family is to get started on a savings program that will give your children an edge over their peers. Whether that money eventually goes toward a debt-free college education, a reasonable home, or even their retirement 60 or 70 years from now doesn't matter. What does matter is that your children will have choices they wouldn't otherwise have had.

A great time to start
As painful as the bear market was for investors who already have a lot of their money in the stock market, it's given people an opportunity to get into good stocks at great prices.

For instance, using a stock portfolio for kids can serve two purposes: It should grow and provide income like any investment portfolio, but it should also serve as a tool to educate your kids about money and investments.

To bolster that sentiment, investing in stocks that your kids are familiar with can make it far easier for them to get and stay involved in their portfolios. By owning shares of companies whose products they use every day, kids really connect with the idea that they have a piece of a real company that serves them and millions like them.

The kid portfolio
To get a sense of just how much good an investment portfolio can do for your kids, let's take a look at a sample portfolio of seven companies that children everywhere know and understand:

Stock

2-Year Average Annual Return

18-Year Average Annual Return

McDonald's (NYSE: MCD)

14.0%

12.4%

Coca-Cola (NYSE: KO)

(0.5%)

7.8%

Disney (NYSE: DIS)

5.3%

6.3%

Nike (NYSE: NKE)

10.2%

13.9%

Apple (Nasdaq: AAPL)

33.8%

15.9%

Mattel (NYSE: MAT)

13.0%

6.8%

Hasbro (NYSE: HAS)

23.6%

8.7%

Source: Yahoo! Finance.

Even if you only set aside a single $100 investment in each of these stocks, if they perform as well as they did over the past 18 years -- a period that includes two bear markets -- you'll have nearly $5,000 to help your children reach their financial goals.

How to go forward
To open a brokerage account for children, you have a number of choices:

  • A custodial account lets you act as a fiduciary for your kids, investing their money for them while they're under the legal age of majority in your state (typically 18 or 21). After that, you're required to turn over funds in a custodial account directly to the child's control.
  • For education, alternatives include the Coverdell ESA and 529 college savings plans. The Coverdell acts like an IRA, in which you make after-tax contributions but then don't have to pay tax on the income produced as long as it goes toward allowed education expenses. A 529 account shares the same tax advantages, but typically you must choose from among a specific set of investments offered by the particular plan you choose.
  • Lastly, you can keep the account in your name. That way, you're under no legal obligation to turn over the funds to your kids at any particular age and can instead spend it on behalf of your kids or simply keep the money until your kids are ready to assume responsibility for their money.

With all you do for your kids, opening a brokerage account may seem like a minor step. But in the end, it could be the thing they most appreciate from you -- if you use the opportunity to give them the financial education they'll need to survive in the coming decades.

For more on getting your kids started with money:

Another useful tool for teaching kids about investing is our Motley Fool Stock Advisor newsletter. Fool co-founders Tom and David Gardner offer advice in simple terms that kids and adults alike can understand and act on. See for yourself free with a 30-day trial.

This article was originally published on March 3, 2009. It has been updated by Dan Caplinger, who doesn't own shares of the companies mentioned in this article. Walt Disney and Coca-Cola are Motley Fool Inside Value picks. Apple, Walt Disney, and Hasbro are Motley Fool Stock Advisor recommendations. Coca-Cola is a Motley Fool Income Investor selection. The Fool owns shares of Hasbro. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy is kid-tested and mother-approved.