Micro-Investing: What You Need to Know Before You Get Started

This article is provided for informational purposes only and should not be construed as legal or investment advice. Always consult with a professional financial or investment advisor before making investment decisions.

In the past, brokerages — firms that connect buyers and sellers to complete investment-related trades — required buyers to have thousands of dollars in their accounts to get started. This made it difficult for the average person to open an investment account, as it could take years to acquire the cash needed to meet these account minimums.

However, a new phenomenon has arisen within the past few years, changing the investment landscape. That phenomenon is known as micro-investing. Micro-investing allows you to invest small sums of money. 

The rise of micro-investing apps has been fueled by millennials and has made investing more accessible than ever before. Of course, there are both pros and cons worth considering.

In this article, we’ll outline everything you need to know about micro-investing. We’ll start by defining what micro-investing is and how it works. Then, we’ll jump into whether it’s a beneficial investment strategy and the things you should be on the lookout for if you choose a micro-investing platform. By the end of this article, you should have a much better idea of whether micro-investing should be a part of your financial strategy moving forward.

What is micro-investing, and how does it work?

Micro-investing is the act of investing small sums of money. As mentioned previously, in the past, investment platforms and brokerages required a lot of money for a minimum investment.

Micro-investing changed this. Part of the reason the barrier to entry is smaller is that micro-investment platforms allow you to purchase fractional shares of stocks and other similar investments. 

Take Apple, for example. As of August 2022, the stock is currently trading around $150. With a typical brokerage, you would have to purchase an entire share of Apple. However, micro-investment platforms often allow you to purchase fractional shares. So, if you only had $15 to invest, you could purchase one-tenth of a share.

Depending on which micro-investing app you use, you may be able to purchase:

• Individual stocks listed on the stock market

• Bonds

• Exchange-traded funds (ETFs)

• Mutual funds

• Cryptocurrencies

Now that you have a better understanding of how micro-investing works, let’s take a closer look at whether it’s a beneficial investment strategy.

Is micro-investing a beneficial investment strategy?

Micro-investing could be a worthwhile investment strategy because it could help build wealth without the barrier to entry of traditional investing platforms. By allowing you access to stocks and other securities, you can fund investment accounts outside of your standard retirement savings.

However, there are a few things that you’ll want to consider before doing so. In terms of financial management, you’ll want to make sure you address the following first:

• Pay down your existing debts: Before putting money toward investing, consider paying off debts with high interest rates, such as personal loans or credit cards. Also, make sure you can make the minimum monthly payment on other loans, like your mortgage.

• Put money in a rainy day and emergency fund: Sometimes, unforeseen situations arise. Having a rainy day and emergency fund can help you cover unplanned expenses. Store this money in a separate savings account so that is easily accessible when you need it.

• Take advantage of your employer-sponsored retirement account: Many employers offer a 401(k) with an employer match. Taking advantage of the employer match essentially allows you to invest free money. Additionally, there may be tax benefits associated with your employer-sponsored retirement account.

• Consider funding either a traditional or Roth IRA: There are tax benefits associated with both traditional and Roth IRAs.

Though it depends on what you purchase, standard micro-investments don’t offer the tax benefits of an employer-sponsored retirement account or an IRA. You may want to consider taking advantage of those benefits first before contributing to a regular investment account. You may also want to take time to fully understand how stocks are taxed. 

It’s also important to understand that any type of investing, including micro-investing, can be risky. It’s been recently documented just how much money you can lose on a micro-investing platform.

These platforms are great because they offer access to stocks that individuals may not otherwise have access to, but it’s important that you understand the risks going in and know that you could potentially lose your money. Stocks can have the highest yields but also the biggest losses.

Because of these risks, you may want to speak with a trusted financial advisor before making investment decisions. A financial advisor can help you clarify your investment goals, better understand your risk tolerance and determine the best investment strategy for you.

What should I look for when choosing a micro-investing platform?

If you do decide to start micro-investing, there are a few things that you’ll want to look for:

• Trading fees: Does the app charge you for each trade that you make?

• Management fees: Does the platform charge you a fee, typically a percentage of your overall portfolio, to manage your money each year? This may also be listed as a monthly fee.

• Minimum account balance: Are you required to have a certain amount in your portfolio at all times?

• Type of management: If you are purchasing a mutual fund, is the account actively managed by a financial advisor, or is it managed by robo-advisors? Robo-advisors rely on algorithms that assess your risk tolerance. You won’t receive hands-on management, but your fees may be lower.

• Past performance: If purchasing a mutual fund, how has it performed in the past?

• FDIC-insured: Some micro-investing apps also offer banking services, such as checking or savings accounts. These accounts should be FDIC-insured. 

• Mobile app: Can you make trades and check your investments from your phone?

• Access to a diversified portfolio: Can you purchase different types of securities, allowing for portfolio diversification?

• Withdrawal penalties: Are there any fees if you withdraw money from your portfolio within a certain time frame?

There are numerous micro-investing apps available. Some of the more popular ones today include:

• Robinhood

• Acorns

• Stash

• Betterment

• SoFi

• Wealthsimple

It is likely worth your while to research the available platforms and determine which best meets your needs and goals.

Micro-investing can be one part of your financial journey

Managing your personal finances can be challenging. Once you have paid off your debt and have saved an emergency fund, your next focus may be on investing. However, a typical brokerage may require you to put down thousands of dollars to get started. That’s where micro-investing comes into play.

Micro-investing only requires small amounts of money. In fact, depending on which micro-investing platform you use, you can start by investing nothing more than your spare change. Micro-investing may be a good way for beginners to start their investment portfolio, though you may want to first speak with a financial advisor to better understand your overall investment strategy.

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