A financial analyst explains micro-investing, the low-risk way to get into stocks
On the rare occasions that my immigrant parents and I talked about money while I was growing up, the conversation often turned to frugality. The precarity in which they lived, especially during their first few years in the U.S., taught them the importance of always hoarding their cash, just in case. Perhaps because of that survival instinct, instilled in me from a young age, throwing money at stocks always felt incredibly risky and beyond reach. So I perked up when I recently learned about the concept of micro-investing, which allows you to invest small amounts of money in the stock market through apps like Stash and Acorns, and can make investing less daunting. Here’s what you need to know about micro-investing, according to a finance expert.
First of all, what is micro-investing?
Typically, if you were to go to a traditional stockbroker like E-Trade, you’d need to buy one whole share of a stock, explains Chris Browning, a financial analyst and host of Popcorn Finance, a personal finance podcast." (E-Trade does not offer fractional shares, based on its website.) If you wanted to buy one share of Tesla stock on September 16, you’d need to shell out $447. “A lot of people who are casually jumping in [investing] don’t have $400 to throw at one share of stock,” Browning tells Mic.
Some micro-investing apps, on the other hand, like Stash, allow you to buy fractional shares. In other words, “you can put in one dollar, and it would give you one-four-hundredth of a share of Tesla,” Browning says. “That’s why it’s become so popular. You can buy pieces of these companies without having to purchase a full share of stock.”
You can also buy exchange traded funds (ETFs) and index funds. Simply put, they're both a collection of many investments, bundled into one. But compared to mutual funds like index funds, ETFs tend to have lower fees, and you can buy and sell them more frequently (although this isn’t encouraged — more on that later), as Caleb Silver, editor in chief of Investopedia, explained to Browning on his podcast. Micro-investing apps differ in in investment options they offer, though, so do your homework.
Micro-investing apps make investing more accessible in other ways, too. They eliminate the transaction fee to buy shares, and Robinhood doesn’t charge a fee to even open, close, or maintain an account. You also don’t need to invest much. Spare change apps like Acorns, for instance, let you invest the change left over after rounding your credit or debit card purchases to the nearest dollar; when this adds up to $5, the app deposits it into your investment account.
Micro-investing can give you a lay of the land, familiarizing you with a stock is, what investing looks like, what companies are out there, and how the stock market operates, all through a clear, simple user interface, Browning says.
How do I know if micro-investing is right for me?
Browning recommends micro-investing only if you have discretionary funds — meaning, if you’ve already set up your emergency fund, retirement fund, and other crucial, long-term investing. Limit micro-investing to only 10% of those discretionary funds. “If you lose that, you’re not going to throw away your finances.”
I think I want to try micro-investing. How do I get started?
Take your time, try a few apps, and see which interface you prefer, Browning says. The good news is that you’re not locked into a contract or other agreement; if you don’t like a certain app, close your account, withdraw your money, and try something else.
It might be a good idea to invest in an index fund — basically, a collection of investments that mimics a stock market index, like the Dow Jones or S&P 500 — to start, Browning says. The reality is, “the majority of people are not good at picking stocks.” With an index fund, “you’re benefiting from the entire stock market over time.” An index fund modeled after the S&P 500, which includes the 500 biggest publicly traded companies in the U.S., for instance, allows you to be diversified among 500 companies very easily. “That’s a less stressful way of investing, without having to take on so much risk.”
What should I keep in mind as I micro-invest?
Remember that you still bear all the risk of your investments, which many first-timers and beginners might not fully understand, and that any amount you invest carries risk, Browning says. Move slowly, and take your time to learn about the process of investing.
“People are treating this like gambling to some extent,” Browning says. “You get a lot of people trying to make these home run transactions,” buying shares for, say, $50 or $100, banking on their prices rising quickly, then selling them in hopes of making some fast cash. The thing is, “it is extremely hard to do. Most people are not good at hopping in and knowing when to buy or when to sell” (unless you have insider information, which is very much illegal).
For instance, if you’re reactive and sell shares of a certain company as soon as you hear bad news about it, chances are, so have other investors, which means you may end up selling at a loss, Browning says. “It’s very easy to go in and lose money quickly.” In most cases, you want to invest for the long haul. Most people who invest their retirement savings in stocks do so for decades. Sure, it may go through dips and recessions, “but overall, the market goes up over the long run.”
Although you can trade index funds and fractional shares, he sees most people using micro-investing apps to trade full shares. If you do that, it’s on you to research the companies.
Likewise, Browning strongly advises against wading into more complex investing, like options trading, which Alexander Kearns had engaged in when Robinhood showed him a huge negative cash balance. He died of suicide in June, and his family believes the user interface misled him.
The tragedy, though rare, is still a cautionary tale. If you stick to trading traditional shares, for instance, the worst that could happen is that one of the companies you bought shares in goes out of business, the stock goes to $0, and you lose the amount at which you bought those shares, Browning explains. But once you get into more sophisticated trading, “the risk goes up exponentially. You can lose not only what you put in, but more than what you put in.”
Also keep in mind that your transactions have tax impacts, Browning says. If you bought a share, sold it, and made a profit on it all in less than a year, you’d need to pay income tax on that profit. But if you held it for over a year before selling it, you’d pay capital gains tax, which can be lower than income tax, essentially incentivizing you to invest over longer periods of time.
Basically, while micro-investing might make investing more beginner-friendly, it isn’t without risk. I’ll personally hold off until I’ve finished saving up for my emergency fund before I give it a try, and even then, proceed with caution. At the very least, now I realize I don't need to move up several tax brackets to invest in the stock market — I can start in the near future.