Micro-investing allows people who might otherwise be shut out of the stock market to build an investment portfolio. High minimum investments can be a barrier for people who don’t have a lot of cash on hand to buy stocks, mutual funds, or other securities. A micro-investing app or platform, on the other hand, can make those kinds of investments accessible. Instead of investing thousands of dollars, you may be investing pennies instead. For example, a micro-investing app might round up your purchases and send the difference to your investments.
How Micro-Investing Works
Generally, micro-investing works by allowing you to build wealth over time using small amounts of money. But in terms of what it looks like in action, there typically are two paths you can pursue using downloaded apps. The first method rounds up daily transactions in your bank account and invests the spare change from each transaction after it reaches a minimum amount, such as $5. After linking your bank account, the app scans your transaction history and finds the money to invest. These round-ups are usually invested into a diversified, prebuilt portfolio of exchange-traded funds that include stocks and bonds. The other option for micro-investing is to use an app that lets you choose small amounts to invest on a daily, weekly, or monthly basis on what you can afford, also called dollar cost averaging. After linking the app to your bank account, you tell the app how much you want to invest and how often. That amount is debited from your bank account according to the schedule you set, then invested for you. You can use an app such as Stash to invest in a portfolio, ETFs, or fractional shares of stock on a recurring or round-up basis. Fractional share investing allows you to purchase less than a full share of a particular stock. The portfolio your money goes into can depend on your risk tolerance, age, and investment goals. Micro-investing apps may ask you to complete a short risk questionnaire when you sign up to decide which portfolio you should invest in. Or you may be given your choice of portfolios. The app may or may not rebalance your portfolio for you automatically. Acorns and Qapital are two examples of micro-investing apps that offer automatic rebalancing of portfolios.
Pros and Cons of Micro-Investing
Pros Explained
More accessible investing: Micro-investing apps can help make saving and investing a habit for people who might otherwise feel shut out of or overwhelmed by the stock market. Smaller minimum investment: Rather than needing thousands of dollars to invest, it’s possible to grow a diversified portfolio with your spare change. Automatic investments can add up: Even though you’re investing smaller amounts of money, your total adds up over time through the power of dollar cost averaging and compounding interest.
Cons Explained
Monthly fees: Fees can detract from investment returns so it’s important to know what you’ll pay before downloading a micro-investing app.May fall short of your savings goals: Investing your spare change alone may not be enough to help you reach your retirement savings goals.Limited investment options: Micro-investing apps may limit you to investing in stocks, exchange-traded funds, or predesigned portfolios.
What Micro-Investing Means for Individual Investors
If you’re unsure about investing or don’t have a lot of money set aside to invest, micro-investing may be a way for you to start building your portfolio. It’s a way to create wealth, as small sums of invested money can grow into a large amount over time. There are multiple platforms to choose from depending on your investment style. While it offers convenience and access to markets, micro-investing does come with its own challenges of costs and limited investment options. Consider all factors before you invest your money, no matter how small the sum may be.
