What Is a Micro-Investing Platform?
A micro-investing platform is an application that allows users to regularly save small sums of money. Micro-investing platforms aim to remove traditional barriers to investing, such as brokerage account minimums, to encourage people to invest even if they have limited incomes and assets.
- By making investing simple and painless, micro-investing platforms can help people who otherwise wouldn’t accumulate savings for future investment.
- These platforms take tiny amounts of money, usually from rounding up transactions, and invests them into ETF-based accounts.
- Small savings can add up over time to yield returns that beat traditional savings vehicles like a savings account of certificates of deposit.
Understanding Micro-Investing Platforms
Micro-investing platforms are the digital-age equivalent of taking all the spare change from your purchases and saving it in a jar until the jar is full, and then taking the full jar of change to the bank. For example, you could sign up for an account with a platform and register your debit card. Each time you make a purchase, the platform rounds up your purchase to the nearest dollar and deposits the difference into an investment account. Roboadvisors such as Acorns helped pioneer this concept.
You are unlikely to notice the extra $0.50 missing from your account when you pay $3.50 for a cappuccino, but over time, you will notice the growing sum in your brokerage account. If you buy that same coffee 20 times a month (basically, every workday), you will have effortlessly invested $10 by the end of the month or $120 by the end of the year. Of course, a better solution would be for you to make your own cappuccinos at home for $0.50 and invest the $3.00 savings per cup and end up with an extra $60 a month and $720 a year to invest, but for individuals who don’t want to change their behavior, micro-investing offers a superior alternative to investing nothing at all.
How Micro-Investing Works
Micro-investing makes investing sums as low as a few pennies possible by eliminating per-transaction fees and investment minimums. Consumers don’t need to save up $100 for one share of a stock or mutual fund, and they don’t need to pay a brokerage fee to purchase that share. Instead, they pay the micro-investing platform a nominal fee, perhaps $1 per month, and it invests their money in fractional shares.
Because those fractional shares are in exchange-traded funds (ETF), the consumer’s investment is diversified across many different stocks and/or bonds, helping to protect against market swings in a way that investing in a single stock does not.
Even for people who save regularly, micro-investing platforms can improve their situation. Saving $50 a month for 10 years in a savings account with 0% interest rate results in $6,000, which actually has less intrinsic value after 10 years since savings accounts usually pay interest at a lower rate than inflation. Investing $49 a month (after the $1 platform fee) for 10 years with an average annual return of 7%, however, results in $8,580 before taxes and inflation.
Automatic investment is not a required feature of a micro-investing platform. The ability to invest very small amounts of money is. To that end, some micro-investing platforms aim to help users to not only get in the habit of saving and investing but also to learn about investing. The platform might teach them how to choose an ETF based on their goals, risk tolerance, interests and beliefs, for example.
A notable micro-investing platform is Acorns Inc. which automatically invests a user's spare change through a smartphone app. Micro-investing platforms must register with the Securities and Exchange Commission (SEC) as a Registered Investment Advisor (RIA) and as a broker-dealer.