What is micro-investing?

Micro-investing is where you invest small amounts of money on a regular basis with the hope that over time, every little bit you invest adds up to a lot.

Today, there are dozens of micro-investment apps in the global market, a clear indication that it’s growing as a popular option among the next generation of investors. How does micro-investing work and what options are there available? Let’s take a closer look.

What is micro-investing?

Micro-investing allows you to invest small amounts of money to help build up a profitable fund. The premise is simple – if you frequently make small contributions over time into an investment portfolio, you have the potential to earn more than you would if you saved it as cash in a savings account.

Not every micro-investment platform works the same way. Some let you invest smaller amounts than is normally allowed into the stock market, also called fractional investing. Others work by investing your spare change from everyday purchases when you link your bank account.

An example of spare change micro-investing. Let’s say you purchase a coffee for $4.60 with your debit card. The total purchase amount is rounded up to $5, with the excess 40 cents automatically diverted into your investment fund. While each small amount doesn’t sound like a lot on its own, it can add up over time to a much more sizeable investment balance. If you wish, you can also set up a regular recurring investment or deposit lump sums into your investment fund, whenever you come into any extra cash.

The funds are then invested in low-cost exchange traded funds (ETFs) or a portfolio of shares. In this way, even people who may not think they have enough disposable income to invest can start building an investment portfolio. You can then monitor your account balance through a smartphone app or by logging in online.

Who may be suited to micro-investing?

Micro-investing is a suitable option for anyone looking for a cheap and convenient way to start building an investment portfolio. However, because micro-investing requires a long time frame to build up any significant wealth, it may be more suited to a younger demographic.

It’s also essential to be aware that there are costs to micro-investing which may eat into what you’re saving or getting back in returns. It’s important to double-check fees with the performance of the chosen investment portfolio. For example, if you’re only investing $5 per month, the total fees are $2.50 per month and the returns are less than 1% per month, you’re probably better off sticking to a savings account.

The fees. There is any number of fees that micro-investment may charge. Some of the most common include:

• Brokerage fees. The cost each time you make a transaction or invest.
• Subscription or management fees. An ongoing monthly or yearly fee to keep the account open.
• Other fees. Additional costs may include cancellation fees, withdraw fees, transaction fees and account opening fees.

That said, you don’t need to be a millennial to take advantage of the benefits of micro-investing. In short, anyone who thinks they might benefit from the convenience of an automatic investment plan should consider the benefits of this approach.

Providers that offer micro-investing

Micro-investing is still a relatively new sector on the financial scene. So at the time of writing, there are only a few micro-investing platforms up and running. Companies such as Stake, let you invest small amounts at a time into the stock market and is the only company in New Zealand that offers a mobile app.

You can learn the basics of micro-investing below, but keep an eye out for other fintech startups looking to break into the market in the coming months and years.

Sharesies

Sharesies makes investing easy. Plus, investing is not just for adults; with Sharesies you can also invest for your child. It is never too early to learn the value of investing!

Sharesies lets you invest in three different investment categories – Companies listed on the NZX, ETFs and Managed funds.

If you are just starting to invest, you can choose from three ready-made orders: A Responsible order – suitable for those with social and environmental good as a priority, which is a diversified portfolio. ETFs – Which are made up of a number of companies. A Global order – This gives you access not only to the NZX 50, but also the 500 of the largest US companies, Europe, Asia and other emerging economies.

However, if you are experienced in investing shares, you can choose a DIY order, which allows you to invest manually and choose multiple funds.

Although Sharesies does not have a mobile app, you can add a web-app bookmark to the home screen of your Android or iOS device.

Hatch

Operated by Kiwi Wealth ethical investment fund, Hatch, a share trading platform helps Kiwis invest in the US market. You can invest in shares in individual companies, plus exchange-traded funds.

Hatch offers shares in nearly 3,000 companies, for example, Netflix and Facebook. Plus with over 500 exchange-traded funds, you should be able to find something to fit your trading needs.

Again, it does not as yet have a mobile app but its website is user-friendly.

Stake

Stake is a share trading app that allows you to buy and sell shares listed in the United States, such as Facebook, Google or Telsa. Plus, the best part is there’s no brokerage fee for the service.

Because it doesn’t collect small change or invest for you on a regular basis, it’s not a traditional micro-investment service. However, it does let you invest smaller

amounts than you normally can into shares, thanks to its fractional investment feature.

So, instead of buying whole shares, you can buy fractions of shares. For example, a share in Google (Alphabet Inc) costs you more than $1,000 but using Stake, you can invest as little as $10. If you were to invest $1,500 in Google and its share price was $1,000, you would own 1.5 Google shares.

Benefits of micro-investing

There are many potential benefits of micro-investing, including:

It’s easy

• It’s quick and simple to set up an account with a micro-investing platform and link it to your bank accounts. It then acts as a sort of electronic piggy bank for your spare change.

It’s convenient

• Micro-investing requires minimal input on your part. Because the entire process is automated, you can start building an investment balance without even realising it.

You can start a savings habit

• By getting into micro-investing from a young age, you can create positive saving habits that will last a lifetime. It’s a very effective way for people who have never invested their money before to make a start.

Minimal investment required

• You don’t need a huge bank balance to take advantage of a micro-investing platform. With some, you can start by investing your small change and then watch your balance grow.

Choose from diversified portfolios

• The money in your investment fund can be balanced in a diversified ETF portfolio based on your financial goals and your appetite for risk. You don’t need to be an investment expert or have specialised financial knowledge.

What are the risks of micro-investing?

Like any other investment option, micro-investing also comes with a certain level of risk. There’s no guarantee that the investment portfolio you choose will perform as you hope, and you could end up losing money. The investment portfolio recommended for you is chosen based on your risk tolerance, so, depending on your financial goals, you have the option to minimise your risk exposure.

It’s also worth pointing out that micro-investing platforms don’t offer their services for free. You need to pay an account management fee that’s either a flat fee or calculated based on a percentage of your account balance, while brokerage and ETF management fees also apply when you purchase ETFs through your account.

These fees may also differ depending on your account balance, so it’s essential to monitor your account regularly to make sure the fee structure continues to work in your favour.

The last thing to remember with a micro-investment account is that because the investing takes place in the background, it is sometimes easy to forget about your account. While this can be a good thing for those investors who might be tempted to ‘over-manage’ their savings, it’s still important to regularly review the performance of your investments to ensure that they are meeting your expectations.