What Is Micro Investing and Is it Right For Me?
Micro investing is a relatively new phenomenon in the financial world, which you may have read about recently in the news. It has helped make the financial market more accessible to the masses. But what exactly is it? The clue is in the name, but we will explore this question further, looking at some of the benefits, drawbacks and alternatives.
What is Micro Investing?
With the constant evolution of technology, trading is becoming more and more accessible to an ever increasing audience. New innovations are stripping away previous barriers to entry which existed to those wanting to enter the world of trading and investing.
One of the most recent of these phenomenons is “micro investing”. Micro investing, as the name implies, allows people to regularly invest small amounts of money into a portfolio, removing brokerage account minimums. This has opened up investing to people that previously did not have the required capital to start an investment portfolio.
This new method of investment is particularly appealing for the younger generation, providing exposure to a world which was previously off limits to them and, in doing so, can help instil the habit of investing for the future.
How Does it Work?
As well as being able to actively make contributions into an investment portfolio, most of these apps can usually be linked to the client’s debit or credit card. Users can choose whether to make a regular contribution to their account or to “round up” their purchases.
The option to round up your purchases means that the app will round up any purchases the client makes and deposit the additional funds into their portfolio.
For example, let’s say that you used your credit card to purchase a drink at the pub which cost £5.50, the app would round up your purchase to £6 and channel the extra £0.50 into your investment account.
What Investments Are Available to Micro Investors
The majority of these platforms focus on Exchange-Traded Funds (ETFs). ETFs are a listed security which are made up of a basket of other securities, such as stocks, bonds, commodities or even real estate. These baskets of securities tend to represent and attempt to track an underlying index, economy or sector.
It is also possible to purchase stocks through micro investing apps. In both cases, the apps allow their users to make fractional purchases of the ETFs and stocks.
For example, an investor may wish to invest $10 in Apple, but Apple’s shares are currently trading at around $120 each. Some of these apps will allow their users to invest this $10 and acquire approximately 1/12th of an Apple share.
Despite this practice not being possible on the stock market, micro investing apps offer fractional investing by purchasing the entire share and then splitting it into fractions for its users.
Depicted: Admiral Markets MetaTrader 5 - Apple Inc. Daily Chart. Date Range: 16 December 2019 - 24 February 2021. Date Captured: 24 February 2021. Past performance is not necessarily an indication of future performance.
There are several benefits that come from micro investing, some of which we will look at below.
Low Minimum Investment Requirements and Fees
Traditional investments require a sizable amount of capital to get started and this is a barrier which prohibits many, particularly younger, people from entering the world of investment.
The removal of conventional minimum investment requirements highlights the major selling point of micro investing and the reason behind its growing popularity. Many platforms will allow you to start investing with as little as $5.
Moreover, the platforms tend to have low management fees when compared to traditional asset managers, although this varies depending on the provider.
Hands on Investing Experience
Micro investing presents an opportunity for new investors to get familiar with the basics of investing and the financial markets, whilst potentially making money doing so. Moreover, the low sums being invested mean that users are exposed to less risk while they learn the fundamentals of investing.
Furthermore, this hands on experience should help encourage more people to adopt better financial habits than they may have previously. Saving a pound here and a pound there may not seem significant at the time, but this money undoubtedly adds up and, perhaps once micro investors become more familiar with how the market works, they will make the transition to larger savings and investments.
Is it Right For Me?
So is micro investing worth getting involved in? This question really depends on who is asking it. As we have seen, for a certain person, particularly a younger person, it can be a great way to gain exposure to and learn about investing while only risking small sums of money.
However, with small investment comes small returns. Whilst every little investment adds up over time, this method is unlikely to satisfy any ambitious long term investment goals which you have and, as such, it probably should not be viewed as anything other than a useful stepping stone for propelling yourself into the investment world.
What is more, micro investing mostly only provides access to a limited number of investment opportunities and is no substitute for the plethora of financial instruments available by investing through more traditional brokerage firms.
A lot of the appeal surrounding micro investing centres on the assumption that all brokers require high minimum deposits and investments, and charge high account fees. However, this is not always the case.
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In order to make your first investment, follow these steps:
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Depicted: Admiral Markets MetaTrader 5 - Market Watch
- Right click on the symbol in your Market Watch tab and select ‘Chart Window’
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Depicted: Admiral Markets MetaTrader 5 - New Order
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.