Stocks vs. ETFs: What’s the Best Choice for Growing Your Child’s Investment Account?

Stocks vs. ETFs: What’s the Best Choice for Growing Your Child’s Investment Account?

Investing for your child’s future is one of the most impactful financial decisions you can make. Whether you’re looking to build wealth for their education, first home, or long-term financial security, getting started with the right investment strategy is crucial. But if you’re new to investing, you might be wondering: Should I buy individual stocks or invest in exchange-traded funds (ETFs)? What’s the difference, and which one is better for growing my child’s investment account?

If you’ve never invested before, don’t worry—we’re breaking it down in the simplest way possible so you can make an informed decision.

What Are Stocks?

A stock represents partial ownership of a company. When you buy a share of a company’s stock, you own a small piece of that business. If the company does well, the value of your stock may increase, and you could earn profits either by selling your shares at a higher price or through dividends (which some companies pay to shareholders as a share of their earnings).

To give you a clearer picture, here are some examples of stocks and ETFs that are often considered good options for long-term growth, especially for a child’s investment account:

Examples of Stocks to Consider:

• Technology:

  • Apple (AAPL): A leader in consumer technology with a strong brand and consistent innovation.

  • Microsoft (MSFT): A diversified tech giant with strengths in cloud computing, software, and gaming.

• Consumer Staples:

  • Johnson & Johnson (JNJ): A healthcare and consumer goods company with a long history of stability and dividends.

  • Procter & Gamble (PG): A company with well-known household brands and a history of consistent dividend growth.

• Retail/E-commerce:

  • Amazon (AMZN): A dominant force in e-commerce and cloud computing, with strong growth potential.

Important Note: These are just examples, and past performance is not indicative of future results. Always conduct thorough research or consult with a financial advisor before making investment decisions.

Pros of Investing in Individual Stocks:

• Higher Potential Returns: If you pick the right companies, individual stocks can deliver strong returns over time.

• Dividends: Some stocks pay dividends, providing an additional stream of income.

• Control: You can choose exactly which companies you want to invest in.

Cons of Investing in Individual Stocks:

• Higher Risk: If the company doesn’t perform well, your investment can lose value.

• Requires Research: You need to analyze companies and understand market trends.

• Lack of Diversification: Investing in just a few stocks means your portfolio is more vulnerable to market fluctuations.

What Are ETFs?

An exchange-traded fund (ETF) is a collection of stocks (or other assets) that trades on an exchange like a stock. Instead of investing in a single company, an ETF lets you invest in a diversified group of companies all at once. ETFs can be focused on different themes, such as technology stocks, large U.S. companies, or even the entire stock market.

Examples of ETFs to Consider:

• Broad Market ETFs:

  • Vanguard Total Stock Market ETF (VTI): Tracks the entire U.S. stock market, providing broad diversification. For more information, check out this guide from the Motley Fool.

  • iShares Core S&P 500 ETF (IVV): Tracks the S&P 500 index, representing large-cap U.S. companies. Seeking Alpha is a popular platform for investment research and analysis. This link leads to a page with comprehensive information about ETFs.

• Growth ETFs:

  • Vanguard Growth ETF (VUG): Focuses on U.S. companies with high growth potential.

  • Invesco QQQ Trust (QQQ): Tracks the Nasdaq-100 index, which is heavily weighted in technology stocks.

• International ETFs:

  • Vanguard Total International Stock ETF (VXUS): Provides exposure to stocks outside the U.S., offering global diversification.

Why these ETFs are often recommended:

• They offer broad diversification, reducing risk.

• They have low expense ratios, minimizing fees.

• They provide exposure to various market segments, allowing for a balanced portfolio.

Remember:

• ETFs provide diversification, but they are still subject to market risk.

• Choose ETFs with low expense ratios to maximize returns.

• Consider your child’s age and risk tolerance when selecting ETFs.

Pros of Investing in ETFs:

• Diversification: ETFs spread your investment across multiple companies, reducing risk. To learn more, check out this article from the Wall Street Journal.

• Lower Maintenance: You don’t need to constantly research individual stocks.

• Lower Cost: Many ETFs have low fees compared to mutual funds or actively managed investments.

Cons of Investing in ETFs:

• Potentially Slower Growth: ETFs usually follow a broad market index, so they may not grow as fast as a well-chosen individual stock.

• Less Control: You can’t pick specific stocks within an ETF.

Stocks vs. ETFs: Which is Better for Your Child’s Investment Account?

Choosing between stocks and ETFs depends on your risk tolerance, investment knowledge, and time commitment.

• If you prefer a hands-on approach and are willing to research individual companies, investing in stocks may be a good fit.

• If you want a simple, low-risk way to build long-term wealth without actively managing your portfolio, ETFs are a great option.

• Many investors combine both, using ETFs for diversification while also investing in individual stocks with strong growth potential.

For most beginners, ETFs are often the best starting point because they provide diversification and require less active management. Over time, as you become more comfortable with investing, you can add individual stocks to your child’s portfolio.

How to Get Started

If you’re new to investing, here are the key steps to open a brokerage account and start investing for your child:

1. Choose a Brokerage Platform – You’ll need an investment account to buy stocks or ETFs. Platforms like Mostt make it easy to open a brokerage account and start investing toward your child’s future.

2. Decide on Your Investment Strategy – Will you focus on ETFs, individual stocks, or a mix of both? Here are 5 Key Investment Strategies to Learn before you get started.

3. Set Up Recurring Contributions – Even small, regular investments can grow significantly over time.

4. Monitor and Adjust – While long-term investing doesn’t require daily attention, it’s good to check in periodically and make adjustments as needed.

By starting early and making informed choices, you can help secure a strong financial foundation for your child’s future. Whether you choose stocks, ETFs, or a combination of both, the most important step is simply getting started.