This Is One 'Stock' Gift To Avoid

by: Reuben Gregg Brewer

Summary

Stockpile is offering investors a new way to buy stock.

Its “stock” gift cards are a unique idea.

However, the drawbacks are far too large.

I love learning about new ideas and I love finance. So when I read in The Wall Street Journal about stock "gift" cards being offered by a new company called Stockpile, I just had to find out more. In the end, I found that the idea sounds great but there are so many drawbacks that I think most should avoid Stockpile's "stock" gift cards.

What's a "stock" gift card?
Stockpile's idea is truly wonderful. The company sells "stock" gift cards in local retailers like a grocery or office supply store. A customer can then pick up a $25 gift card for IBM (NYSE:IBM) or Disney (NYSE:DIS) or even Berkshire Hathaway (NYSE:BRK.B). The word "stock" and the name of the company are emblazoned across the card, so you know what you are getting (and don't mix one of these cards up with, say, a $25 gift card to eat at Chipotle). And there are larger cards, too, if you are feeling more generous.

Stop and think about that for a second. How wonderful would it be to buy your grandchild just a little bit of Berkshire Hathaway? Set the kid off on the right foot, get them started in investing early... Maybe you wish someone had done that for you -- or, if you were lucky, maybe someone did. A Stockpile gift card hits right at that desire. Only the reality of the fine print tarnishes the idea.

Just a little bit of fine print
First off, according to the Journal, that $25 gift card will cost you $4.95 to buy in the store (a $50 card costs $6.95 and the $100 version will cost you $7.95). Online at Stockpile's website you can get a card for $2.99 plus 3% of the card value. The idea is that, as the gift giver, you are taking on all the costs for the gift, like trading commissions, so the recipient won't have any impediment to their stock ownership. That's a very positive way of framing what amounts to a nearly 20% "commission" on a $25 gift card. Give the gift online and the cost falls to around $3.75, an almost 15% "commission."

That's a huge cost, particularly when some brokers are willing to give away free trades for new business. True, you might need more than $25 to open an account for Junior and there are likely to be more headaches involved in the process, but I'd be loath to pay what amounts to a trading commission of that scale for anything.

To be fair, the fees being charged are covering more than just trading costs, since Stockpile has to pay for all of the infrastructure that supports its business. In many ways it's similar to buying a Visa gift card at a store... the Visa gift card is worth $50, but you'll have to pay $5 or so to buy it. As you might guess, I'm not fan of that type of gift card, either, since I'm essentially paying $55 for the privilege of giving someone $50--I'll just write a check, thanks.

Beyond cost, you'll also want to think about just how easy a Stockpile "stock" gift card is. On that front, it's easy for you, anyway. You buy the card and send it off. But Stockpile is actually handling the stock side of things through a registered broker dealer, Stockpile Investments, Inc. So the person who gets the gift has to open a brokerage account to use it to get that $25 piece of Berkshire Hathaway you were so excited to give. You need to really consider this before you buy a card -- can the person you are sending the gift to (or their parents) handle this step?

Another wrinkle is that they don't have to buy Berkshire if they don't want to. They can buy a number of different stocks. That's not a bad thing, unless you had your mind set on a specific stock. The bigger problem is that they don't have to buy stock at all. What?

I've been putting the word "stock" in quotes for a reason. These cards are really just gift cards that have a $25 cash value (or whatever amount you decide to give). Once a brokerage account is open, the recipient can buy whatever stocks Stockpile offers (the list is limited, though large enough for most small investors). They can also sidestep the whole thing and switch the card out for a card to their favorite retailer. For minors this requires parental approval, so at least there's some safeguard against youthful exuberance. But you'll never know if that's what happens, which could set up all kinds of awkward conversations down the line if you try to talk about the company.

In other words, you may start out with great intentions of teaching a child about investing and wind up having the money spent on video games. And, even if they do wind up using the money to invest, the process that you are imposing on the recipient is more complicated than you may realize. The one thing that I think should be clearest in your mind, however, is that a "stock" gift card with Berkshire Hathaway listed on it is not the same thing as a stock certificate with Berkshire Hathaway on it. Stockpile's cards are just storing cash until they are used in some way.

There are other issues, too, like trades are aggregated and only take place once per day and when stock is sold there's a commission of $0.99. These types of things are relatively minor in my opinion compared to the issues above and $0.99 is a far from onerous commission in most cases. On the bright side, it's worth noting that junior can add additional money to the account (perhaps from an allowance) at no cost once it is set up. That said, any additional gift cards you might buy him or her will still come with the same cost structure.

Good intentions, but...
In the end, I'm going to say that Stockpile was created with good intentions. The problem is in the realization. This is a very expensive way to give the gift of stock (a service I use called Loyal3, a similar idea in many ways, provides free aggregated trades). The gift may not actually lead to a stock purchase at all. And if the recipient does buy stock, the one you picked or not, there's still a brokerage relationship involved (no matter how simple Stockpile tries to make this necessary step, many people just don't get finance well enough to handle this kind of relationship).

As is often the case, a new idea catches my eye and fails to excite me after closer scrutiny. That's the way it should be since all ideas aren't great ideas. I just want to make sure you understand what Stockpile is offering if you see these "stock" gift cards in your local store and think, "What a great idea." Perhaps the trade-offs are OK with you if it means getting a child started on a life-long investing journey, but you should know about them before you put a Stockpile card in your grocery basket.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.