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How to invest £200 for a grandchild?

Investment | Shares Helpful? 7

Asked by FilthyLucre, submitted 09 September 2014.

Open Quote I would like to give my grandson £200 for his 21st birthday. It's not a lot but is all I can afford. I would like this to be used as his introduction to equity based investments - hopefully, an acorn that will in time become an oak.

The gift will come with conditions: it has to be used only to buy equities; and all income and gain has to be reinvested. I will guide and supervise until he feels sufficiently confident to make his own investment decisions. Initially, the strategy will be to aim for modest, 10% net gains. If he can make eight such transactions in a year he will double his original £200. I know that individual equities can be high risk but this can be reduced with careful stock selection.

Given the very small amount of starting capital, I have to find the cheapest way of getting him started. Managed funds, trackers and even ETFs all carry charges whereas with equities there is only the 0.5% stamp duty and the broker's fees - a whopping £11.95 in the case of Hargreaves Lansdown. But there are other, cheaper share buying services. My question: What is the very cheapest way of getting my grandson started?
End Quote

Answered by Justin on 28 October 2014

While your sentiment is admirable in practice there are some practical difficulties here.

Firstly, because your grandson is over age 18 there is no simple way to stop him doing whatever he wants with the money. While you could attach conditions, there is no practical legal way to enforce this without using a trust, which would not be cost effective for £200. Anyway, let’s hope he is trustworthy and follows your wishes.

The lowest cost stockbrokers would be SVS Securities and at £5.75 and £5.95 per trade respectively. The downside is that these fees would also apply if your grandson were to reinvest dividends, which won’t prove cost effective. Hargreaves Lansdown charges £11.95 per deal but only 1% to reinvest dividends (minimum £1). Either way, dealing fees will make a large dent into the £200.

Buying funds avoids the dealing fee, but then other platform charges may apply and many have minimum investment levels above £200. Hargreaves Lansdown lets you invest from £100 per fund and although its 0.45% annual platform is steep on larger sums, it’s inconsequential on £200. If you’re concerned about fund charges consider a low cost tracker. However, if your grandson closes the account Hargreaves will hit him with a £25 & VAT charge.

Finally, I would urge a big dose of realism regarding potential returns. If your grandson can double his money in a year he would be exceptionally fortunate. In practice returns are likely to be much lower than this, even negative shorter term.

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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