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If you’ve ever collected a horde of spare coins in a jar — saving them for years before placing them in rolls and depositing them at the bank — you’ve had an introduction to the principle of micro-investing. Micro-investing refers to the process of regularly investing small amounts of money to build up a stake over time while participating in financial markets.
As you might have learned from your heavy coin jar, even spare change can gradually grow into a significant sum if saved regularly. And for many of us, doing without these funds wouldn’t impact our lifestyle.
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How Micro-Investing Works
If you can’t dedicate much money toward investments, it might take years to acquire a large enough stake to reach a mutual fund’s minimum investment or make investing in individual stocks or bonds practical. Alternatively, micro-investing allows you to invest regularly but with less money upfront, often automatically.
Most micro-investors use mobile apps designed for this purpose. You can make these small investments by arranging transfers of some custom amount at regular intervals. Some apps allow you to round up all your regular debit and/or credit card purchases, with the extra funds being directed into your investment account to purchase securities of your choice. Apps often have very low minimums for investments in funds and frequently offer fractional shares, which allow you to purchase less than a full share of stock. This means that, as a micro-investor, you could have a wide range of securities available to you.
As with any new investment account, you’ll have to provide certain information about yourself. Some micro-investing apps make algorithmic-based investment recommendations — also often referred to as artificial intelligence (AI) generated recommendations — for you based on your information and answers to questions about your goals, risk tolerance and financial circumstances.
Depending on the app you use, your fund transfers might have to reach a certain threshold before they’re invested, but this level is usually quite low.
Before Micro-Investing
Here are five things to consider before adopting a micro-investment strategy:
1. Be aware that all apps aren’t created equal. Micro-investing apps vary in available investments, fees and ease-of-use. Read the disclosure materials to learn about fees and other important information, including details about account access and data-sharing, which might expose you to additional risks. Many apps don’t charge trading commissions. But phone support for questions or problems might be lacking. Download and explore the app before opening an account to see if you’re comfortable with the interface. Also, some apps will hold your uninvested cash — and, if offered by the app, free promotional credits — in an affiliated money service business that doesn’t include FDIC or SIPC protection. Read reviews from trusted and objective sources to compare apps and learn which might best fit your goals and experience.
2. Check to see if the firm is registered. All brokerage firms that are in the business of buying and selling securities in the U.S. must be registered with the Securities and Exchange Commission and be members of FINRA. Research any firm you’re considering using FINRA’s BrokerCheck tool. You might also want to read the firm’s Form CRS, which is a relationship summary provided to investors that features important information about the firm, including certain disclosures.
3. Pay attention to fees. Fee structures vary. Some have no upfront fees or trading commissions, while others charge commissions and/or monthly fees. Your costs might depend upon the services you use and how you trade. Some apps charge extra for premium services. Others charge to transfer money, move your account or mail paper account statements. Consider how these fees might affect your investment returns. Even a nominal monthly fee can have a big impact on your returns for a small account. Additionally, because they can’t be transferred to another firm, you’d have to sell any fractional shares — and move cash resulting from the sale — prior to moving your account, which could have tax implications. Talk with a tax professional to understand how you might be impacted.
4. Watch out for unexpected charges. Automatic debits from a checking account or credit card might result in additional fees. To contribute to an investing app, you must provide the platform with access to other financial accounts. If an investing app tries to debit your account when the balance isn’t sufficient, you could face overdraft fees. Some apps require that the customer turn off overdraft protection for connected accounts to avoid these fees. Also consider that investments charged to a credit card could result in interest charges that exceed any investment gains if you don’t pay the card off monthly.
5. Avoid over-trading. The ease-of-use and design style of micro-investing apps might encourage investment choices based on emotion rather than sound rationale. Frequently entering and exiting investments based on impulsive decisions or fear of missing out (FOMO) can have a negative impact on your performance.
Consider talking with an investment professional about investment strategies and what’s best for you, including a long-term plan for retirement savings.
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