How to Invest in DRIPs for Kids

Time is on your side when it comes to saving and investing, and it is never too early to get started. In fact, the stock market can be a particularly good place for kids to invest, because those young people will have decades to ride out any temporary declines along the way. DRIPs, or dividend reinvestment plans, are perfectly suited to young investors, who might not have a great deal of money to invest. With DRIPs, parents can buy stocks directly, without incurring brokerage fees or other trading costs.

Make a list of several kid-friendly companies you want to research. Buying kid-friendly stocks is a good way to get the kids interested in saving and investing. Many kids would be thrilled to find out that they are part owners in Disney or McDonald's.

Log on to the website of each company you want to purchase. Search the website for a link to the Investor Relations department. Call or email the contact listed and ask if the company has a DRIP established.

Check financial publications like Money Magazine and Kiplingers for information on DRIPs. These monthly periodicals sometimes run stories about investing for children, and DRIP information is often a part of their recommendations.

Obtain an application for the DRIPs you want to invest in. Because there are no brokerage costs associated with DRIP investing, it is a good idea to spread the money around to several different stocks. Even the strongest and most financially stable companies can run into hard times, and investing in many different stocks helps to spread the risk.

Set the account up as a custodial account, using either the Uniform Gift to Minors Act (UGMA) or the Universal Transfer to Minors (UTMA). With a UTMA account, the custodian retains control of the funds for a longer period of time, generally until age 21 to 25 depending on the state. With a UGMA account, the children have control of the money as soon as they reach the age of majority, which in most states is the age of 18. Mark the appropriate spot on the DRIP application to indicate that the account is to be a custodial account. Be sure to provide the full legal name and Social Security number of the child on the application.

Submit the application, along with your initial investment, to the address listed on the form. You can open some DRIPs with as little as $10, and then add to them as you wish. Many parents and grandparents add money to their children's DRIPs at every birthday, with additional gifts during the holiday season and other special occasions.

Review the confirmation you receive from each DRIP. Make sure the child's name has been spelled correctly, and that the proper Social Security number is reflected on the UGMA or UTMA account setup. Contact the administrator of the DRIP if any corrections are needed.