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What is micro-investing?

Round up your spare change into big bucks for automatic investing.

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Micro-investing is when you invest small amounts of money on a regular basis so that it adds up to a larger investment over time. Today, there are dozens of micro-investment apps in the global market, a clear indication that it’s a popular option among the next generation of investors. Learn how it works and your options for getting started in the US.

What is micro-investing?

Micro-investing allows you to invest small amounts of money to contribute to building up a profitable fund. The premise is simple: If you make small, frequent contributions over time into an investment portfolio, you have the potential to earn more than you’d saved it up as cash in a savings account.

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

Example of spare change micro-investing.

Let’s say you purchase a coffee for $4.60 with your debit card. Your app may round up the total purchase to $5, with the excess 40 cents automatically diverted into your investment fund. The small amount doesn’t sound like a lot on its own, but it can add up over time into a more sizable investment balance. If you wish, you can also set up a regular recurring investment or deposit lump sums into your investment fund whenever you receive extra cash.

The funds are then invested into low-cost exchange-traded funds (ETFs) or a portfolio of stocks. 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 to your account online.

Who is micro-investing best for?

Micro-investing is a suitable option if you’re looking for a cheap, convenient way to start building an investment portfolio. However, because micro-investing requires a long time frame in order to build up significant wealth, it’s well suited for younger investors.

Keep an eye on costs that can eat into what you’re saving or getting back in returns. Double-check fees with the performance of the app’s chosen investment portfolio. For example, if you’re investing only $5 per month, the total fees are $2.50 a month and the returns are less than 1% a month, you’re likely better off sticking to a savings account.

The fees

Common fees your micro-investment app may charge include:

  • Brokerage fees. The cost each time you make a transaction or invest.
  • Subscription or management fees. Ongoing monthly or annual fee to keep the account open.
  • Other fees. Look out for cancellation, withdrawal, transaction 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.

How do I start micro-investing?

Ready to put your pennies to work? Here’s how to get started:

  1. Compare brokerages. Not all investment platforms offer micro-investing, and the ones that do have varying account options and features. Before you open an account, explore your brokerage options by comparing features, fees and customer feedback.
  2. Open an account. Once you’ve found a brokerage you like, open an account. Most platforms offer online applications, but be prepared to supply your personal information, including your Social Security number or government-issued ID.
  3. Fund your account. To fund your new account, you’ll need to link an existing bank account and indicate how much you’d like to transfer.
  4. Set automated investments. Most micro-investing platforms rely on automated transfers or spare change round-ups. Indicate how often you’d like to transfer funds or what limits you’d like to impose on how your transactions are handled.
  5. Monitor your investments. Log in to your brokerage account to track the performance of your investments.

Which providers offer micro-investing?

Micro-investing is a relatively new sector on the American financial scene. Of the few micro-investing platforms up and running, Acorns is probably the best known of the roundup-style bunch.

Robo-advisors are also getting into some of the same micro-investing features. Stash, Wealthsimple and Clink also offer to round up your purchases and invest the spare change, while Robinhood, Fidelity, SoFi Invest, Stockpile, Betterment and others offer the ability to purchase fractional shares of stock with as little as $1.

Keep an eye out for other fintech startups looking to break into the market in the coming months and years.

Acorns

Acorns rounds up the amount of your daily purchases to the next dollar and invests the excess into your choice of five diversified portfolios managed by the company. The portfolios vary in their goals and target investor profiles.

There are no minimum account balances, and deposits and withdrawals are free. All you need to do to get started is link a bank account and provide ID, income information and your financial goals.

Rather than charge a percentage-based management fee like other robo-advisors, Acorns assesses a flat $1 fee each month.

Stash

Instead of rounding up your spending, Stash uses a feature called Smart-Stash to analyze your income and spending patterns and automatically pull money into your investment account. Once there, you can invest in individual stocks or choose theme-based portfolios.

The minimum deposit to open is just $5, and Stash charges a flat $1 monthly fee for its service.

Robinhood

Robinhood offers a no-cost take on the traditional brokerage account, and its micro-investing features enables you to invest any amount in any US-listed stock or ETF, plus major cryptocurrencies. It does that through fractional shares.

Once linked to your bank account, you can take advantage of a limited amount of instant deposits, and there are no commissions on stocks, ETFs, options or cryptocurrencies.

SoFi Invest

SoFi Invest brings together a wide array of options into a single combination that offers just about everything except rounding up your purchases. Like Robinhood, it features a fractional share feature called Stock Bits as well as no fees or commissions on stocks, ETFs and cryptocurrencies.

In addition, SoFi offers the automated goal-based investing of a robo-advisor. And it comes from a company that offers a much wider array of products as well, including loans, insurance and cash management.

Benefits of micro-investing

Many micro-investing platforms offer a quick and simple way to link your bank account, acting like an electronic piggy bank for your spare change.

  • It’s convenient. Micro-investing requires minimal input on your part. In some cases, the entire process is automated and you can start building an investment balance without much realizing it. In other cases, you can access investments you otherwise wouldn’t have been able to afford.
  • Establish a savings habit. Micro-investing can help create positive saving habits that last a lifetime. It’s an effective way for Americans 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. Start by investing your small change, and watch your balance grow over time.
  • No need for investment expertise. The money in your investment fund can be balanced in a diversified ETF portfolio based on your financial goals and your appetite for risk.

What are the risks of micro-investing?

Like any other investment option, there’s no guarantee that the investment portfolio you choose through your micro-investing platform 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 minimize your risk exposure.

  • Potential fees.You may 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 may also apply when you purchase ETFs through your account.
  • Easy to forget.Because the investing takes place in the background, you might not remember it’s there. While this can be a good thing for investors who tend to “overmanage” their savings, make sure to regularly review the performance of your investments to ensure they are meeting your expectations.

Bottom line

It doesn’t always take a large amount of money to invest for the future. Through micro-investing features like roundups and fractional shares, you can begin investing without altering your lifestyle and access the investments you want easily and affordably.

Each platform invests a little differently, so compare your options to find the right fit for your budget and spending habits. And if you’re not sure what all’s available, check out our guide to the world of investments.

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