Micro-investing is when you regularly invest little sums of money with the motive of achieving knowledge (of investing) and returns on the capital that you have slowly invested.
Today, many micro-investing applications exist out there, which clearly shows that this is a popular alternative for young and upcoming investors. But how does micro-investing actually work and is it really worth the hype? Let’s have a closer look.
Table of Content:-
What is Micro-Investing?
Micro-investing is a service that makes investing possible in small amounts, even with a few pennies. Micro-investing is basically a beginner’s step in the world of investing and a way to help people that don’t have heaps of money to invest. It also encourages people to invest at a very young age in order to gain experience.
Micro-investing allows you to make micro-investments in real estate, rental property, stocks, cryptos, etc. It also involves very little risk as you’re only investing a few pennies. If you’re new to investing, micro-investing is a great way to start as it gives you the chance to learn and make mistakes without having much to lose. Although micro-investing is not a massive yielding investment, it can still be a source of passive income and a great source of learning.
How to Micro-Invest?
In order to answer this, we must first look at what micro stocks are. Micro stocks are generally companies with a market cap of less than $300 million. These companies usually trade their stocks for under $5.
There are a number of ways to invest in micro stocks.
You can study and analyze some micro stocks in the stock market based on the company’s fundamentals and price trends or depend on services that make investing easier and less complicated.
Some popular micro-investing apps like Acorns, Robinhood, Stash provide services that make micro-investing easier and hassle-free for you. Once you link your bank account and spend money or make transactions using a debit card that’s linked to that account, it rounds up each transaction to the nearest dollar and invests a small change into your portfolio.
For example, if you buy a coffee worth $2.50 with your debit card, it will round up $2.50 to $3 and these 50 cents on top of your actual bill will be invested into your portfolio. You can choose the type of portfolio you want to invest in, involving different levels of risk. It shows you the different individual shares where your money is being invested, most of which are Exchange Traded Funds or ETFs.
ETFs are a basket of securities that have lower risk than other individual securities. Let’s say, if you want to invest in the technology sector, without wanting to take much risk, you can buy a tech-based ETF rather than investing in Microsoft, Apple, Netflix or Tesla as this effectively gives you exposure to all of these stocks and allows you to own a fraction of their shares and create a diversified portfolio of investment.
Once you start to study and research those stocks, you will be able to learn about the stock market as a whole, gradually.
These apps charge a small amount of fee for the services they provide. The fee varies between $1 to $2 per month for accounts with less than $10,000 in them.
A website- Brickx.com allows you to invest in residential properties and own a small percentage of assets, as the name suggests, making you own bricks in properties. You can earn rental income proportional to how much of the property you own as well as the capital returns in line with the property value when you sell your bricks.
How Does Micro-Investing Work?
Micro-investing works on the Dollar Averaging Methodology. This methodology is based on the idea of investing a small amount of money consistently over a long period of time. The huge benefit of this methodology is that it takes advantage of the fact that over the long term, the stock market worldwide has always gone up.
Micro-investing apps essentially take small amounts of money from people, pull them together and invest the money into a diversified portfolio. It gives you profits depending on your percentage of investment. While using micro-investing apps, you must consider the brokerage fee relative to the amount of money you’re putting in since brokerage fees over a long period of time eat away your returns.
Benefits of Micro-Investing
- Micro-investing allows younger people, who lack the funds, to invest in the traditional market in a non-traditional manner.
- Micro-investing is a gateway method to get into the stock market without knowing much about the market. Let’s assume that you have a good amount of money to invest but lack knowledge of the stock market and its trends, you might fail as an investor and lose all your money. So micro-investing is a gateway for traders to get into the stock market without having much knowledge about the market.
- It gives you a chance to learn the market gradually as you make your trading decisions. As you invest a few cents into the market, you see how the market moves and begin to understand what that money is going towards.
- It allows you to experiment using different strategies and techniques to learn to make a good portfolio.
- Micro-investing is a great way to gain confidence to take a further step towards building your own portfolio.
- Once you learn how the market works, you can use the money invested in these micro-investing apps to actually invest in the traditional stock market.
- Using micro-investing apps, you don’t have to time the market or worry about selling in and out to make profits or avoid losses. You keep your money saved in these apps and let it compound over a long period of time.
Limitations of Micro-Investing
- If you’re investing a relatively less amount of money over the month, let’s say less than $10, the brokerage fee might eat up much of your returns. For example, if you’re investing around $8 over a month, and get returns up to $8.50 with a brokerage fee of $1, you basically end up losing 50 cents this way.
- With micro-investing, you may not be able to buy individual stocks and even if you do, you will be left with very limited options.
- Micro-investing applications usually don’t provide you with much authority over the stocks you buy. Even when they do, it is just a typical modification, such as low risk, moderate risk and/or high risk.
Micro-investing is certainly not a way to get rich, or get anywhere close to rich, but it definitely is a great way to save money on a long term basis. The returns of micro-investing are not as massive as the returns from traditional investing, but it is still a better way to grow your wealth than let your money sit in your savings account. You can always think of micro-investing as the first step to begin your journey as an investor.