Micro-investing is the process of investing small amounts of money regularly. The process of micro-investing involves small and sometimes irregular investments where the individual can set up recurring payments or invest a lump sum as cash becomes available.
Understanding micro-investing
Before there was such a thing as a digital transaction, consumers looking to save their spare change may have used a piggy bank.
As cash becomes obsolete, however, many consider micro-investing to be a viable modern-day alternative.
Micro-investing is a passive solution designed to make investing simple and accessible for beginners. Most can get started with as little as $5 invested into a diversified portfolio.
The process of micro-investing involves small and sometimes irregular investments.
The individual can set up recurring payments or invest a lump sum as cash becomes available.
Some micro-investing platforms will also allow the user to round up a transaction to the nearest dollar and invest the difference.
For instance, the purchase of a coffee for $3.75 would be rounded up to $4 with the remaining 25 cents invested.
With interest rates at historic lows, micro-investing can generate a better return than if the funds were to sit idle in a standard savings account.
The main micro-investing platforms
There are many micro-investing platforms on the market today, with most removing or at least reducing the barriers to traditional investing such as brokerage fees, management fees, and minimum investment amounts.
Some of the most popular micro-investing platforms include:
Acorns is a fintech platform providing services related to Robo-investing and micro-investing. The company makes money primarily through three subscription tiers: Lite – ($1/month), which gives users access to Acorns Invest, Personal ($3/month) that includes Invest plus the Later (retirement) and Spend (personal checking account) suite of products, Family ($5/month) with features from both the Lite and Personal plans with the addition of Early.
A mobile app that rounds up the spare change from daily purchases and invests the remainder into a diversified portfolio of exchange-traded funds (ETFs), bonds, indexes, and even Bitcoin.
Users can choose a portfolio based on their risk appetite and there is no fee for depositing or withdrawing funds from the platform.
Public.com
A commission-free micro-investing platform for Millennial and Generation Z consumers that incorporates aspects of social media.
Public.com users can own fractional shares in stocks and ETFs, follow popular creators, and discuss strategies with a community of like-minded others.
M1 Finance is a North American online trading platform for common and preferred stocks and exchange-traded funds (ETFs). The company also offers margin lending, cash management, and a checking or debit account service. M1 Finance has a standard assortment of revenue streams for an investment platform. As a market maker earns money on the bid-ask spread, M1 Finance also offers a single premium subscription dubbed M1 Plus, and through interest and interchange fees.
M1 Finance is an automated solution that invests on a user’s behalf and will also rebalance a portfolio based on preconfigured asset allocation targets.
Spaceship Voyager
Another robo-advisor platform that lets the user transfer small amounts into three portfolio options comprised of some of the world’s most innovative and socially responsible companies.
Spaceship Voyager charges a flat monthly fee with no additional charge for a customer holding multiple portfolios.
Robinhood is an app that helps to invest in stocks, ETFs, options, and cryptocurrencies, all commission-free. Robinhood earns money by offering: Robinhood Gold, a margin trading service, which starts at $6 a month, earn interests from customer cash and stocks, and rebates from market makers and trading venues.
One of the first micro-investing platforms launched in 2013. The app was designed to be as intuitive as possible with no bells and whistles or confusing terminology.
For the more hands-on micro- investor, Robinhood provides real-time market data and also allows Bitcoin trading.
Micro investing vs. retail investing
Retail investing is the act of non-professional investors buying and selling securities for their own purposes. Retail investing has become popular with the rise of zero commissions digital platforms enabling anyone with small portfolio to trade.
Throughout the 2020s, retail investing has exploded as liquidity became easily available in the markets, thus making millions of people, especially younger people, enter financial markets.
This also gave rise to another form of retail and micro-investing called meme investing.
Meme stocks are securities that go viral online and attract the attention of the younger generation of retail investors. Meme investing, therefore, is a bottom-up, community-driven approach to investing that positions itself as the antonym to Wall Street investing. Also, meme investing often looks at attractive opportunities with lower liquidity that might be easier to overtake, thus enabling wide speculation, as “meme investors” often look for disproportionate short-term returns.
Meme investing is a phenomenon where thousands or millions of tiny investors come together, creating buzz around a trend, thus propelling these stocks.
The case that got the most attention was the GameStop saga, which saw a group of meme investors play against Wall Street, forcing the liquidation of various hedge funds shorting the stock.
Key takeaways
Micro-investing is the process of investing small amounts of money regularly.
Micro-investing can occur via a recurring or lump sum payment. Many platforms also allow customers to round up day-to-day transactions to the nearest dollar and invest the difference automatically.
Micro-investing platforms include Acorns, Public.com, M1 Finance, Spaceship Voyager, and Robinhood. Most were designed to remove the barriers associated with traditional investing, such as brokerage fees, fund management fees, and minimum investment amounts.
The circle of competence describes a person’s natural competence in an area that matches their skills and abilities. Beyond this imaginary circle are skills and abilities that a person is naturally less competent at. The concept was popularised by Warren Buffett, who argued that investors should only invest in companies they know and understand. However, the circle of competence applies to any topic and indeed any individual.
Economic or market moats represent the long-term business defensibility. Or how long a business can retain its competitive advantage in the marketplace over the years. Warren Buffet who popularized the term “moat” referred to it as a share of mind, opposite to market share, as such it is the characteristic that all valuable brands have.
The Buffet Indicator is a measure of the total value of all publicly-traded stocks in a country divided by that country’s GDP. It’s a measure and ratio to evaluate whether a market is undervalued or overvalued. It’s one of Warren Buffet’s favorite measures as a warning that financial markets might be overvalued and riskier.
Venture capital is a form of investing skewed toward high-risk bets, that are likely to fail. Therefore venture capitalists look for higher returns. Indeed, venture capital is based on the power law, or the law for which a small number of bets will pay off big time for the larger numbers of low-return or investments that will go to zero. That is the whole premise of venture capital.
Foreign direct investment occurs when an individual or business purchases an interest of 10% or more in a company that operates in a different country. According to the International Monetary Fund (IMF), this percentage implies that the investor can influence or participate in the management of an enterprise. When the interest is less than 10%, on the other hand, the IMF simply defines it as a security that is part of a stock portfolio. Foreign direct investment (FDI), therefore, involves the purchase of an interest in a company by an entity that is located in another country.
Micro-investing is the process of investing small amounts of money regularly. The process of micro-investing involves small and sometimes irregular investments where the individual can set up recurring payments or invest a lump sum as cash becomes available.
Meme stocks are securities that go viral online and attract the attention of the younger generation of retail investors. Meme investing, therefore, is a bottom-up, community-driven approach to investing that positions itself as the antonym to Wall Street investing. Also, meme investing often looks at attractive opportunities with lower liquidity that might be easier to overtake, thus enabling wide speculation, as “meme investors” often look for disproportionate short-term returns.
Retail investing is the act of non-professional investors buying and selling securities for their own purposes. Retail investing has become popular with the rise of zero commissions digital platforms enabling anyone with small portfolio to trade.
Accredited investors are individuals or entities deemed sophisticated enough to purchase securities that are not bound by the laws that protect normal investors. These may encompass venture capital, angel investments, private equity funds, hedge funds, real estate investment funds, and specialty investment funds such as those related to cryptocurrency. Accredited investors, therefore, are individuals or entities permitted to invest in securities that are complex, opaque, loosely regulated, or otherwise unregistered with a financial authority.
Startup valuation describes a suite of methods used to value companies with little or no revenue. Therefore, startup valuation is the process of determining what a startup is worth. This value clarifies the company’s capacity to meet customer and investor expectations, achieve stated milestones, and use the new capital to grow.
Profit is the total income that a company generates from its operations. This includes money from sales, investments, and other income sources. In contrast, cash flow is the money that flows in and out of a company. This distinction is critical to understand as a profitable company might be short of cash and have liquidity crises.
Double-entry accounting is the foundation of modern financial accounting. It’s based on the accounting equation, where assets equal liabilities plus equity. That is the fundamental unit to build financial statements (balance sheet, income statement, and cash flow statement). The basic concept of double-entry is that a single transaction, to be recorded, will hit two accounts.
The purpose of the balance sheet is to report how the resources to run the operations of the business were acquired. The Balance Sheet helps to assess the financial risk of a business and the simplest way to describe it is given by the accounting equation (assets = liability + equity).
The income statement, together with the balance sheet and the cash flow statement is among the key financial statements to understand how companies perform at fundamental level. The income statement shows the revenues and costs for a period and whether the company runs at profit or loss (also called P&L statement).
The cash flow statement is the third main financial statement, together with income statement and the balance sheet. It helps to assess the liquidity of an organization by showing the cash balances coming from operations, investing and financing. The cash flow statement can be prepared with two separate methods: direct or indirect.
The capital structure shows how an organization financed its operations. Following the balance sheet structure, usually, assets of an organization can be built either by using equity or liability. Equity usually comprises endowment from shareholders and profit reserves. Where instead, liabilities can comprise either current (short-term debt) or non-current (long-term obligations).
Capital expenditure or capital expense represents the money spent toward things that can be classified as fixed asset, with a longer term value. As such they will be recorded under non-current assets, on the balance sheet, and they will be amortized over the years. The reduced value on the balance sheet is expensed through the profit and loss.
Financial statements help companies assess several aspects of the business, from profitability (income statement) to how assets are sourced (balance sheet), and cash inflows and outflows (cash flow statement). Financial statements are also mandatory to companies for tax purposes. They are also used by managers to assess the performance of the business.
Financial modeling involves the analysis of accounting, finance, and business data to predict future financial performance. Financial modeling is often used in valuation, which consists of estimating the value in dollar terms of a company based on several parameters. Some of the most common financial models comprise discounted cash flows, the M&A model, and the CCA model.
Business valuations involve a formal analysis of the key operational aspects of a business. A business valuation is an analysis used to determine the economic value of a business or company unit. It’s important to note that valuations are one part science and one part art. Analysts use professional judgment to consider the financial performance of a business with respect to local, national, or global economic conditions. They will also consider the total value of assets and liabilities, in addition to patented or proprietary technology.
The Weighted Average Cost of Capital can also be defined as the cost of capital. That’s a rate – net of the weight of the equity and debt the company holds – that assesses how much it cost to that firm to get capital in the form of equity, debt or both.
A financial option is a contract, defined as a derivative drawing its value on a set of underlying variables (perhaps the volatility of the stock underlying the option). It comprises two parties (option writer and option buyer). This contract offers the right of the option holder to purchase the underlying asset at an agreed price.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
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