How to Buy Stocks as Gifts -- and My Two Top Recommendations

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Tis' the season for family, fruit cake, and scrambling to find gifts. For those of you still looking for gifts ideas for your children, grandchildren, nieces, and nephews, why not stocks?

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Stocks can make excellent gifts for kids for two reasons: Firstly, the miracle of compounding can work wonders for those with a long time horizon, and secondly, stocks are a great way to get children involved in finance.

Here's how you can buy stocks for loved ones this holiday season, along with my two top recommendations.

How to buy stocks as gifts

Children are not allowed to own financial assets in most states, so you will likely have to open a custodial account until the child comes of age. One common form of custodial account is a UTMA account, which you can read about here.

One website that makes gift-giving easy is Stockpile, which not only allows you to open a custodial account but also buy fractional shares of stock. You can buy stock in increments as small as $25, even if the stock price is much higher. Fees are $0.99 per trade, although $2.99 for the first purchase.

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Now that you know how to give stock, which should you buy this season?

Criteria

For stock gifts for kids, I'd focus on two specific characteristics:

  1. Staying power – The last thing you want is for your giftee to open their account on their 18th birthday and realize their gift is worthless. That means looking for a company with a durable moat. Preferably, you'd also want shares in a company with several business lines, to offset any potential weakness in a particular product.
  2. Growth prospects – In addition to durability, significant gains will only be had if your company has ample growth prospects. That means having large addressable markets that are still somewhat untapped.

In that light, here are my two top stocks to give as gifts this holiday season:

Pick 1: Amazon

If I had to own just one stock for the next twenty years, it would likely be Amazon (NASDAQ: AMZN). Amazon, as most know, is the dominant player in the growing industry of e-commerce. In fact, eMarketer forecasts Amazon will account for almost half of all e-commerce sales in the U.S. this year.

But perhaps the most exciting part of Amazon is its Web Services division. AWS is the leading cloud computing infrastructure service, with 44% market share -- over six times as large as second-place competitor Microsoft (NASDAQ: MSFT).

And while you may think Amazon is so large that it can't possibly grow much in the future, think again. E-commerce only makes up about 10% of all retail sales, which means Amazon's overall retail market share is only about 5%. This summer's purchase of Whole Food Market, along with the opening of physical Amazon bookstores, means Amazon is venturing more into physical retail too and not resting on its laurels.

In addition, Amazon Web Services grew an astonishing 42% last quarter, as the generational shift to cloud computing continues. Last month, AWS unveiled dozens of new features at the company's re:Invent summit, displaying the company's ability to innovate at a breathtaking clip.

Pick 2: Tencent

What's one area Amazon can't penetrate? China. Unfortunately, the Chinese government makes it difficult for U.S. tech companies to do business in the country; however, that doesn't mean you can't buy leading Chinese stocks.

The largest company in China currently is Tencent (NASDAQOTH: TCEHY). Tencent dominates online gaming, with over 50% of China's online gaming revenue. Its domination of the gaming business fed the company's whopping 61% revenue growth in the last quarter.

But the real jewel in Tencent's crown may be its WeChat app, which has nearly a billion users and is most Chinese citizens' portal to the internet. On WeChat, users can message friends, post videos, pay bills, and shop online. It's like having the function of all FANG stocks – social media, online shopping, and media -- all rolled into one.

That gives Tencent huge amounts of customer data, which it will likely turn into robust online ad revenues in the future. But Tencent currently only earns $2.10 per daily active user, in stark contrast to Facebook's (NASDAQ: FB) $30.10. That suggests there's tons of room to grow.

Tencent also has 75% of the Chinese music streaming market, owns its own online bank, and has invested $3.5 billion in 41 tech start-ups since 2011, including Tesla (NASDAQ: TSLA), and Snapchat (NYSE: SNAP). If any of these investments turn into home runs, investors share the riches.

So, Amazon and Tencent are my picks -- each dominant businesses, set to grow strongly over the next decade and more. Hey, it sure beats a pair of socks.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Billy Duberstein owns shares of Amazon, Facebook, Microsoft, and Tencent Holdings. The Motley Fool owns shares of and recommends Amazon, Facebook, Tencent Holdings, and Tesla. The Motley Fool has a disclosure policy.