The Beginner's Guide to Micro-Investing for New Investors

Hesitant to dip your toe in investing? Micro-investing might be the answer. Read on to learn what it is and if it's right for you.
The Beginner's Guide to Micro-Investing for New Investors
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No matter your goal, sometimes just getting started is the hardest part. When it comes to investing, people in Europe, the U.S., and elsewhere around the globe find themselves wary of getting involved, even if investing can help them achieve their long-term financail goals. Information gaps, such as the idea that you need a lot of money to start investing, are common factors in this hesitancy. 

The good news is that fintech startups are bringing investing solutions that encourage small or rather mico investments. These small investments are often termed as micro-investments, and the process of making such investments is called micro-investing.

We’re going to look into the basic concept of micro-investing, its benefits, and review some of the leading micro-investing apps in this post. Let’s get started!

What is micro-investing?

Micro-investing or spare change investing is the new kid on the investment block. It is, essentially, the practice of putting away small sums of money towards long-term or short-term investment goals. Micro-investing doesn’t require the investor to make any significant lifestyle changes or learn new saving habits.

We can classify micro-investing apps into two categories, including micro-investing apps that allow investments as small as $5 and spare-change investment apps that round-off your purchase to the nearest dollar amount and contribute the difference to your savings account.

Stash is an example of a micro-investing app that requires a minimum investment of $5. Acorns is another micro-investing application, but it also offers spare-change investments. For instance, if you paid $4.35 for breakfast, Acorns will deduct $5 from your checking account, and reserve 65 cents for your savings. Once these deductions reach $5, Acorns will deposit it in your Acorns investment account.

In addition to offering micro-investments, most of these applications provide access to low-cost exchange-traded funds (ETFs), and some of these platforms even support fractional ETF purchases. The maintenance fee is lower than any conventional investment management accounts, with some charging as little as $1 per month.

Micro-investing applications can be an ideal way of cultivating the habit of investing. Let’s find out why these are suitable for new investors, especially young generations.

Why it makes sense for new, young investors and savers.

While micro-investing is an opportunity for most investors, it intends to benefit young investors the most, especially millennials. A recent poll reveals that four out of 10 millennials do not invest in the stock market as they believe they do not have sufficient money to get started. Millennials are missing out on the long-term wealth generation potential of the stock market. 

Micro-investing apps are helping millennials and Gen X investors invest in stocks. Not only do these apps eliminate conventional barriers to investing, they also offer a plethora of investment options, including stocks, ETFs, and index funds.

For instance, Stash allows users to start investing with $5 and offers an option to choose between different ETFs to invest their money into. Robinhood, another micro-investing app, facilitates no cost stock investments.

Understanding the benefits of micro-investing.

There are several. Let's take a look:

No minimum investment requirements. A high investment requirement in conventional investment accounts is the primary reason behind the popularity of micro-investing applications. You don’t need a $1,000 to get started, which is often the minimum for several traditional mutual funds.

Micro-investing apps, such as Acorns or Stash, allow you to start investing with as little as $5. Clink is another app that takes it further down to $1, allowing you to build up savings with $1 contribution every day.

As an investor, shifting to a small or medium coffee from a large one is all you need to do to start investing with micro-investing applications.

Low asset management fees. Micro-investing applications excel against traditional asset managers in terms of management fees as well. Research puts the average investment management fees at 1.18 percent for investment amounts of up to $50,000, and it slides further down for higher amounts (1.02 percent for $1 million).

Micro-investing apps charge a flat-fee for lower investment amounts and a percentage-fee for portfolios exceeding $5,000. Popular apps such as Acorns, Clink, and Stash charge one dollar per month for managing your investments. The management fee changes for higher account balances.

Ability to choose between multiple investment options. Despite their lower entry barrier and affordable investment management fees, micro-investing apps do not compromise on investment options. You can invest in ETFs or purchase stocks through these applications. Since investors start with lower amounts, micro-investing apps provide fractional purchases of ETF shares and stocks.

Automatic rebalancing of portfolios. Financial planning requires an understanding of how different investments work, their risk profile, lockup period, and distribution methods. A study finds that as many as 40 percent of American adults don’t know when to add fixed-income instruments to their portfolio. A similar trend is witnessed when it comes to portfolio rebalancing. The same thing is likely happening right here in Europe.

For regular investors, allocating the right portions to different asset classes could be tricky, and even trickier when they have to rebalance their portfolio to achieve long-term goals.

Micro-investing apps offer a solution. Instead of having to pick individual investments, all you need to do is to pick up a risk level, such as conservative, moderately conservative, moderate, or aggressive, and the app will automatically adjust your portfolio in accordance with your financial goals. Acorns, for example, features portfolios created by a Noble-prize winning economist, so one can rest assured about the quality of portfolios.

Simple to use interface. Another key differentiator for micro-investing apps is their simple-to-use interface and ability to track your investments on your smartphone. You can see daily contributions, net invested amounts, and growth patterns over different periods.

Most of the micro-investing apps feature a knowledge centre for investors, helping them learn more about the fundamentals of different asset classes.

What are the limitations of micro-investing apps?

As well as benefits, these popular apps come with limitations. Let's dive in:

You may fall short of long-term investing goals. Micro-investing apps can play a critical role in cultivating savings and investing habits. Their ability to offer spare-change investments and round-off feature automate the entire process.

However, the users are in danger of accumulating too little money throughout a year or even longer. Additionally, the sense of saving money you get from micro-investing apps may lead to procrastination in making other investments.

Limited access to different types of accounts. Another primary issue with micro-investing applications is limited account options. As an investor, you can choose between a taxable investment account or a basic IRA. There are no options to open a Roth IRA or other kind of savings, retirement accounts.

Limited diversification. Some micro-investing apps use automatic portfolio allocations suitable for an investor’s risk level. However, it takes away investment discretion by investing in funds it considers appropriate for the investor. Additionally, some micro-investing apps limit investments to ETFs only. While ETFs are great for long term growth, a user may not have an option to choose a specific stock or asset class.

Bottom line ...

The only way to build long-lasting wealth is to invest and let your money grow. Micro-investing apps can be an excellent platform for cultivating the habits of investing and savings, but they’re not a full-fledged replacement for traditional investment options. As an investor, you must increase your contributions in proportion with your income level and adjust it for inflation or other economic factors.

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