Micro-investing describes the act of using small amounts of cash to invest—typically facilitated by using an online platform or app. Micro-investing apps generally have low-to-no minimum investment amounts, relatively low fees, and enable investments in securities traded on stock exchanges (stocks,bonds,exchange-traded funds), unlisted managed funds, and evencryptocurrency.
There’s no definitive criteria for what constitutes a micro-investing app compared to a regularonline share trading platform. Brokerage platforms used to buy securities—like Superhero and Stake—could be considered micro-investing apps because the minimum spend is less than $100.
Related:Our Pick Of The Best Share Trading Platforms For Australians
However, apps that market themselves as micro-investing apps usually have additional features that make it easy for people to consistently re-direct small, or micro, amounts of money towards investing. Common features include:
- Automation of recurring payments to make investing a habit you don’t need to think about.
- Rounding-up purchases made from your bank account to the nearest tenth of a cent or dollar and transferring the difference to your app ready to invest. For example, you pay $4.50 for a coffee, and 50c goes into your app account).
- Fractional investing, which means you don’t need to worry about having enough funds to precisely cover the purchase (or sale) of ‘whole’ shares or units in an ETF/fund—the app keeps track offractional amounts.
Similar to other online financial services and brokerage apps, you’ll need to sign-up for an account, which normally requires providing personal details (including your tax file number), verifying your identity, and possibly linking your bank account or transferring money.
The term micro-investing is also sometimes used when talking about investing small amounts of money into startup businesses through crowd-sourced funding platforms, and other ventures—like an app that lets you buy part-ownership in a racehorse.
Are Micro-Investing Apps Worth It?
Apps that make investing effortless and affordable are particularly beneficial for people with less opportunity to accumulate large lump sums.Investing a little bit regularlycan compound your returns over time. Every spare cent can be put to work and potentially snowball into a more respectable amount of capital within years or decades.
However, just because micro-investing apps let you spend less to become an investor, doesn’t mean the investment products they offer are worthwhile or will grow your wealth. Different apps provide access to different investments with varying risk profiles and rates of return, which need to be carefully evaluated on their own merits.
To judge whether the investment product’s expected returns will see you come out ahead, you also need to get a clear picture of all the costs associated with a particular app and the products it offers.
For instance, if the app fees you’ll pay account for 5% of your total costs for holding an investment, you’d want the investment to have a strong chance of making gains of at least 5% annually, to break even.
Keep in mind that fees will represent a lower proportion of your total investing costs the more you invest. Here’s an example based on an investment product offered through a micro-investing app that charges a $3 monthly fee and a 0.3% annual management fee:
- If you invest $2,000 over a year, your fees ($42), will account for 2.1% of your total costs. The investment must return more than 2.1% for you to make gains.
- If you invest $20,000 over a year, your fees ($96), will account for 0.47% of your total costs. A return on your investment over 0.47% would reflect a gain.
The less you invest, the more your investment will be eaten up by fees. This is a real dilemma if you can only afford tiny amounts and do not consistently build your account balance.
Benefits of Micro Investing Apps
The strongest benefit of micro-investing apps is how affordable and easy they make it to invest often. Provided the investment itself generates positive returns—even if those returns are small, patience and persistence in investing pays off over the long-term.
Some of the market’s most attractive stocks and ETFs are reasonably expensive. One share in CSL limited is valued at $237, anApple sharewill set you back $US173 and one unit in the Vanguard Australian Shares Index ETF (VAS) costs around $86.
You can find quality stocks andETFs at reasonable prices, but the fact remains that with limited funds you have limited options—and you usually need to buy whole shares or units. Additionally, the first time you directly purchase a company’s stock, the minimum investment amount is $500.
Micro-investing apps help you invest whatever you can afford to steadily grow your investment capital. Other benefits can include:
- Diversification:Given that many investments offered by micro investing apps are pooled investments such as ETFs and managed funds, you might benefit from increased diversification compared to buying individual shares. Diversification is a tried and true risk mitigation approach, as you don’t have all your eggs in one basket.
- Ease of managing your investments:Micro investing is often targeted at the inexperienced investor, with app interfaces and investment selection processes that are designed to be more user-friendly.
Cons of Micro Investing Apps
Unlike regularbrokerage appsthat facilitate access to any listed product on the exchanges they support, many micro-investing apps present users with a small selection of investment options—which may be relatively high risk and with no guarantee of strong returns.
So, you may not be able to invest in a specific company stock or ETF you had your eye on, and the options you can choose from may not suit your investing goals or risk appetite.
Encouraging more people to invest is obviously in the interests of the app providers, who profit through the fees they charge. You need to feel confident that the likely returns make it worth paying an app’s fees. If your gains don’t outpace your costs, you’ll be losing money.
A number of micro investing apps manage investments on your behalf—whether that’s through a custodial arrangement or through amanaged fund. That means you don’t directly hold your investments or receive aholder identification number(HIN), giving you fewer protections if something goes wrong (e.g., the app/fund provider becomes insolvent).
Also consider the opportunity cost of putting money into a micro-investing app. Could you get better results from a different method of investing? Don’t sacrifice gains for the convenience or simplicity that a micro-investing app promises. Alternatives could include picking your own ETFs via a brokerage app, investing in a managed fund directly with an investment firm, bolstering your savings or makingadditional contributions to your superannuation.
Related:Our Pick Of The Best High Interest Savings Accounts In Australia
