Say that each morning on your way to work, you buy a coffee that costs $2.40. You decide to use your debit card to pay for the coffee, and in the process, $3.00 is charged to your card. The $0.60 in leftover change, meanwhile, is automatically deposited into an investment through an app. It may not be much, but with each daily cup of coffee, those $0.60 chunks that are deposited end up totalling a hefty sum of money. Rounding up your purchase and investing the spare change represents just one of the popular ways to engage in micro-investing.
It was the case once upon a time that investing in the stock market was almost entirely confined to those privileged few lucky enough to have sufficiently bulging wallets. But as is often the case these days in the era of fintech, the world is consigning that notion firmly to the past. And micro-investing platforms, as the above example illustrates, represent one of the pivotal ways in which virtually anyone and everyone can save and invest much smaller amounts than has historically been the case.
As the name suggests, micro-investing is simply investing small amounts of money into an investment portfolio on a regular basis. In addition to the spare-change facility that many micro-investing platforms now offer, these small amounts can also be used to purchase fractions of shares, which means that investors do not need sizeable sums of money to purchase one whole share of a company. For instance, not everyone can afford to buy a share of Tesla stock, which is now trading comfortably over $400. But by investing, say, $5, a micro-investor can acquire approximately 1/80th of a Tesla share. Although the stock market itself prohibits fractional investing, micro-investing apps will typically buy the entire share and then split it into fractions for its users.
While such fractions may often seem negligible, they nonetheless allow investors who are not exactly flush with cash to gain exposure to many of the world’s most exciting investment opportunities. And by investing small, incremental amounts regularly, the micro-investor can increase exposure to one or several companies over time. The opportunities to buy fractional shares, moreover, allows those who previously would not have been able to access the stock market to now do so. With most micro-finance platforms being made available on apps, it means that anyone with a smartphone can gain exposure to financial markets. As such, micro-investing is playing a hugely important role in the democratisation of finance.
It also means that the process of buying stocks is made decidedly simple to appeal to a wide user base. With money now being saved or invested with just a click of a button, there is no requirement for micro-investors to undergo lengthy, onerous procedures in order to access growth opportunities. Again, this has profound implications for financial inclusion around the world.
Perhaps not surprisingly, micro-investing has gained traction with Millennials in particular. The combination of being a tech-oriented solution and providing the opportunity to invest small amounts means such a service particularly appeals to this relatively young generation. Indeed, a recent survey commissioned by Wealthsimple, a Canadian online investment-management service catering to Millennials, found in 2018 that money causes this particular generation more stress than anything else in their lives. “Micro-investing is the perfect way for millennials or any other generation to begin investing,” the company observed.
Apps such as Acorns provide ideal platforms for micro-investing. The California-based micro-investing specialist allows its customers to invest from just $1 per month by linking their Acorns accounts with their own funding sources, such as checking accounts and credit or debit cards. And it clearly explains the benefits that such a service has over the traditional investing platform—namely, that the latter comes with relatively high minimum-investment requirements and/or hefty fees, which block the path for someone in his or her early investing life. “For example, many actively managed mutual funds require at least $1,000 for an initial investment,” Acorns notes on its website. “And while you may be able to buy into certain stocks with just $5, most brokerage firms generally charge trading fees of $5 to $7 per transaction, making such small investments hardly worthwhile. Plus, a single stock purchase does not make for a well-diversified portfolio.”
Most micro-investing platforms focus mainly on exchange-traded funds (ETFs), which normally consist of a diversified portfolio of stocks as well as other securities on a less common basis, such as bonds, commodities and real estate. It is normally through such ETFs that micro-investing platforms enable their users to purchase fractional shares of stocks.
The round-up feature is also increasingly common among micro-investing platforms. Using the Acorns Round-Up feature, for example, means that every time a customer spends money using a card linked to his or her account, Acorns rounds up the total charge to the nearest dollar. After this is done repeatedly, such that the amounts being rounded up total at least $5, Acorns invests that money into “a mix of exchange-traded funds, a customized portfolio designed to match your personal financial situation and goals”.
More than just representing an opportunity for greater financial inclusion, moreover, micro-investing encourages customers to adopt sound financial habits. Saving or investing small sums may not seem particularly significant over the space of a few months. But should one continue with this habit consistently over several years and even decades, these small sums can add up to a considerable amount. And by giving their money the chance to work and grow over a long horizon, there is every chance that micro-investors will earn returns similar to the long-term market average and, crucially, more than the rate of inflation.
But as the new saying goes, micro-investing produces micro-results. Assuming that comparatively small amounts are being invested each time, such a practice is not likely to make an investor rich in the end. It would seem, then, that it will be more effective as part of a broader investment strategy that involves the bigger sums. Indeed, it is certainly worth remembering that micro-investing is not suitable for all investors, especially the more experienced end of the scale. If you are used to discussing your portfolio asset-allocation options with your fund manager, or even constructing your own portfolio from scratch, then you may well be disappointed with the limitations of micro-investing in terms of both the range of products on offer and the level of sophistication of the investment strategies.
Nonetheless, it is becoming increasingly apparent that micro-investing provides a crucial stepping stone for those seeking a path into the world of investment management, one that requires relatively little time, effort, knowledge and, of course, money to get going. Indeed, what makes micro-investing so appealing is that it can help smaller investors make their money grow more effectively than with a typical savings account. This is especially true in today’s climate, with interest rates at rock bottom in most parts of the world. But investing small amounts in stocks provides micro-investors with a much broader opportunity for their money to grow vis-à-vis putting it in a bank.
And with returns from benchmark stock indexes easily outperforming savings accounts in the long run, this outperformance becomes especially pertinent over longer time horizons. Of course, as all investing platforms make clear, past performances do not necessarily guarantee future results. But a long time horizon means that performance is more likely to be aligned with the long-term historical average.