What Is Micro Investing? |How Does Micro Investing Work? |Micro Investing Vs. Regular Investing | Micro Investing Vs. Larger Sum Investing | Advantages Of Micro Investing |
Disadvantages Of Micro Investing
You may think that investing is out of your reach. As a matter of fact, 48% of people who don鈥檛 invest their money feel that they can鈥檛 afford to.
To a certain extent, this makes sense. The stereotypical investor is a rich person in a penthouse apartment, trading millions of dollars in stocks every day.
But investment doesn鈥檛 have to be expensive. ETFs and finance apps have democratized the financial world to the point where just about anyone can become an investor. So, how can you get in on the micro investing game? Here鈥檚 a quick guide.
What Is Micro Investing?
Micro investing is exactly what it sounds like. Instead of buying individual shares or blocks of 100 shares, you can purchase fractional shares. Take a stock like Tesla, which trades for $219 a share as of October 2022. You might not have that much money to invest out of every paycheck. Using a traditional method, you鈥檇 have to save up $219, then execute a trade. But with micro investing, you could invest just a few dollars.
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How Does Micro Investing Work?
Micro-investing can work in different ways. Some apps, like Robinhood, are designed for people who prefer a hands-on approach to investing. You can buy and sell particular stocks or ETFs at will and invest in any dollar amount.
Other apps, like Acorns, are designed for more hands-off investors. You choose what you want to invest in, and they take care of the rest. Your debit card is linked to the app, which rounds up each purchase to the nearest dollars and invests the change. For example, if you spent $4.50 on a cup of coffee, you鈥檇 see a $5 charge. $4.50 would pay for the coffee, and Acorns would invest the other $0.50.
Micro Investing Vs. Regular Investing
Micro investing and traditional investing aren鈥檛 all that different. You鈥檙e still investing in financial securities, and you鈥檙e still trying to maximize your gains. The main difference is that micro investing is more accessible to the average person.
Regular trading platforms often come with high minimum investments, and you may need to save $1,000 or more before you can even think about investing. You may also have to pay fees of between $5 and $7 per transaction, which makes small-dollar trades prohibitively expensive. And if you鈥檙e only buying individual shares, it can be tough to diversify your investments.
Micro investing platforms have low to no minimum investment and charge no trading fees. Depending on the platform, you can save at your own pace, even if you can only afford to invest a few dollars a month. And since you can buy fractional shares, you can build a diverse portfolio right from the start.
Micro Investing Vs. Larger Sum Investing
There鈥檚 nothing inherently wrong with investing larger sums of money, and people have been doing it for a lot longer than they鈥檝e been micro investing. But if you have to save up to invest more money, you won鈥檛 be optimizing your growth.
Remember, your money only grows when it鈥檚 invested in the market. Every day your money sits in your checking account is a day it鈥檚 not earning any return.
Let鈥檚 say you have $100 a week to invest, but your traditional investing platform requires a $1,000 investment. To save up enough to invest, you鈥檇 have to wait for 10 weeks. During that 10 weeks, you鈥檇 have an average of $500 sitting in checking, doing nothing.
Now imagine you do this on a regular basis, and your investments earn a (modest) 5% average annual return. With an average of $500 not earning a return, you鈥檇 be missing out on $25 per year (and the compound growth that comes with it). With a micro investing platform, you鈥檒l be able to capture all of that growth.
Advantages Of Micro Investing
So, why would you want to pursue micro investing rather than a more traditional method? Here are a few good reasons:
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No minimum investment 鈥� This is the main appeal of micro investing. You can set aside any amount at any time, often as little as $1. Even if you鈥檙e fresh out of college with a boatload of debt, you can still build a nest egg. An investment of pennies a day is better than nothing and can help you build a strong base for future success.
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Plenty of options 鈥� Most micro investing platforms allow you to invest in multiple types of securities. In addition to stocks, you can trade bonds, ETFs, and even commodities. Some micro investing apps even allow you to buy and sell cryptocurrency. As a result, you鈥檙e not locked into one or two types of assets.
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Low or zero fees 鈥� If you鈥檙e investing a few dollars or even pennies at a time, the last thing you need is a bunch of fees. Depending on your platform, fees can cost as little as 1.18%. That鈥檚 far less than you鈥檒l pay on a traditional trading platform./p>
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Automatic portfolio rebalancing 鈥� Many micro investing platforms allow you to allocate your investments by percentage. The app will then periodically rebalance your portfolio without any input on your part. This allows you to maintain a well-diversified portfolio with minimal hassle.
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A simpler interface 鈥� Traditional investing platforms are generally built with experts in mind. They assume that you have experience in the market and know what to look for. Micro investing platforms are built for beginners. They make it easier to find the most important information, so you don鈥檛 have to hunt around.
Disadvantages Of Micro Investing
Of course, micro investing also has its downsides. Here are some of the drawbacks:
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They can lead to bad investing habits 鈥� Most financial advisors recommend buying stocks and sticking with them for the medium or long term. Micro investing platforms make it easy to buy and sell on the fly, which is ultimately a losing strategy.
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Fewer account options 鈥� While you鈥檒l be able to trade securities, that鈥檚 about it. You won鈥檛 be able to open an IRA or money market account, for example.
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Fewer investment options 鈥� Micro investing platforms don鈥檛 always offer the full array of stocks and ETFs you can find on a traditional platform. Some offer ETFs exclusively, so you can鈥檛 buy individual stocks.
Summary
Micro investing represents an opportunity for anyone to get in on the market. With just a few dollars a month, you can buy the same stocks and ETFs as major Wall Street players. It鈥檚 not a perfect system by any means, but it鈥檚 a great way to dip your toes into the world of investing.
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