Skip lottery tickets, here are four investment ideas for young investors: Dale Jackson

Dale Jackson says There are better gift alternatives for kids that can provide life-long lessons on finance and investing (Banque d'images Envato)

After decades of pushing lottery tickets as Christmas gifts, the Ontario Lottery and Gaming Corporation (OLG) is telling parents to avoid giving them to kids.

As online gambling nears epidemic levels among young Canadians, OLG admits its products are a form of gambling and early exposure can increase the risk of future problems.

There are better gift alternatives for kids that can provide life-long lessons on finance and investing, and possibly keep giving long after the holidays.

Custodial investment account

The best way for parents or guardians to give a minor legal ownership of an investment and still retain control is through a custodial investment account available from most major financial institutions.

One example of a custodial account is a registered education savings plan (RESP), which also provides tax perks and government grants.

The child gains full control of the custodial account when they become a legal adult to liquidate or transfer to other trading accounts, such as a registered retirement savings plan (RRSP) or tax free savings account (TFSA).

Here are four investment ideas that allow kids to help finance potentially lucrative businesses or even take an ownership stake. They could be risky, but they are guaranteed to provide a lesson on risk management.

The awesome power of compound interest

Some Gen Xers might remember receiving Canada Savings Bonds for Christmas in the 1980s when interest rates topped 20 per cent. They became more of a booby-prize when rates bottomed out and were discontinued in 2017.

There is still a way to teach kids about the rewards of compound interest through guaranteed investment certificates (GICs).

GICs are ultimately backed by the federal government and currently yield about 3.4 per cent for a one-year term.

Once they reach maturity, the principal and interest can be rolled into other GICs to continually generate further interest on that interest.

Ownership in a familiar business

If bonds aren’t exciting enough, perhaps stocks will brighten their faces on Christmas morning.

Some parents give their children shares in familiar stocks such as Disney but investing in local publicly-traded businesses could make it more personal.

Owning a small part of Nutrien (formerly Potash) in Saskatchewan or Montreal’s Saputo, for example, could spark a deeper dive into the company’s financial health and it’s relationship with the broader economy.

Own the bank that owns you

Many parents will open their child’s first accounts through their regular banks, which often become the child’s bank. Throughout a lifetime, thousands of dollars will likely be paid to that bank through fees and interest payments.

The big Canadian banks, including RBC, TD, BMO, Scotiabank and CIBC are tremendously profitable and safe investments because those profits are protected through strict government regulation.

None of the big Canadian banks have ever missed or lowered their dividend payouts, which currently range from 2.8 per cent and 4.5 per cent.

The bank will normally use those payouts to purchase more of its shares unless otherwise requested.

So, why not teach the kids about pay-back by owning shares in that bank?

Give them an entire index

The best way to teach kids about the broader equity markets is through market-weighted exchange traded funds (ETFs).

They track every major index and sector in the world but the mother of ETFs is the S&P 500 Spider (SPDR).

It is market-weighted because the weighting of each of the benchmark S&P 500 companies in it corresponds to its total market value. The top holdings are currently Nvidia, Microsoft and Apple but the weighings are adjusted daily as share prices rise and fall.

Technology companies currently dominate the top of the S&P 500 but the rest are a broad range of sectors that jockey for a higher spot when the mighty fall.

The S&P 500 tends to rise and fall as its components rise and fall over shorter terms but has advanced overall more than 8.7 times since 1997. That means a $1,000 investment made in 1997 would be valued at $8,700 today.

ETFs can be purchased in U.S. or Canadian dollars but expect higher fees for a Canadian dollar hedge.