If you’re like me: a 20-something-year-old, with no money, lots of debts, and little to no savings, then investing probably seems like a far-off goal that’s simply not attainable for you right now. You’re probably living paycheck to paycheck and assuming that you don’t have enough money to invest in the stock market like everyone else. Who can blame you? When you’re struggling to pay the rent and your paycheck is barely enough to cover your bills or put food in the fridge, the last thing you’re concerned with is saving – let alone investing. If this is you, you’re certainly not alone. According to CNN, 76% of Americans live paycheck to paycheck, with no thought of investing. For us millennials, the statistics get even worse. But, again, who can blame us? In today’s economy, millennials are faced with a plethora of financial roadblocks that create a massive barrier to enter the stock market. Who wants to invest $140 or so dollars for 1 share of Apple stock, when you can use that for food and gas?
So, what’s the solution?
The answer to this great dilemma is to approach investing and saving the way you would build any good habit: starting small, doing it frequently, and building your way up. That strategy is the core of micro-investing – replacing large startup capital with small, frequent savings, that will eventually add up.
Micro-investing allows would-be-investors, like you and me, with little-starting capital, to evade the barriers that usually keep them out of the stock market, like minimum account balances, trading costs, or just not having a lot of money. It is an investment strategy tailor-made for millennials. The idea is that you save small amounts of money so that eventually those minuscule contributions will add up over time. It’s the solution to making investing feasible for young people who don’t make a lot of money or have any assets. It’s basically the concept of a piggy bank, evolved into an investment strategy.
The investment strategy behind micro-investing is actually quite genius. These micro-investing company’s track your purchases, collect a few cents to a few dollars, and then place these incremental amounts into an investment portfolio – usually consisting of Exchange Traded Funds (ETF’s). This is made possible by eliminating transaction fees and investment minimums. Because of that, consumers don’t need to save $140 for one share of Apple and they don’t need to pay a brokerage fee more than $5 to purchase that share. Instead, consumers pay the micro-investing company’s a small fee, and it invests that money in fractional shares of ETF’s. This allows for small investors investment portfolio’s to be diversified across different asset classes, helping to mitigate those sleep-depriving swings in the stock.
Because of its simplicity and ingenuity, micro-investing has the potential to be the catalyst that transforms economic landscapes. Research from multiple sources across global economies has indicated that many people aren’t saving at the rate they should be. The reasons vary as to why, but generally, when consumers don’t have enough disposable income, they don’t save, and thus, they don’t invest. That, in my opinion, is why we have such an income gap, and, why micro-investing can potentially close the gap. Micro-investing technology can help reduce wealth gaps by ensuring that even the smallest investors have the access and the ability to receive similar returns on their money, which are currently dominated by institutions and deep-pocketed investors. Allowing millions and maybe billions of new investors into the market could change the global stock market forever.
Currently, the stock market is completely at the mercy of large institutional investors, who make up the majority of shareholders in the market. That majority ownership over the stock market is the reason why a stock could skyrocket or plunge in the matter of a couple of hours. For example, one sell order on a small cap company from a large institutional holder could collapse a company’s market capitalization in seconds. That one sell order could wipe away billions of dollar of wealth and jobs, all because one holder decided to liquidate its position and move on with its returns. That small cap company could be working on a world revolutionizing project, product, or service - but its future is at the mercy of one or a couple of investors. Micro-investing has the power to change that because there is much more security for a company having millions of different smaller investors than there is in having a small amount of larger investors. This could allow for smaller companies to focus more on their products or services, instead of pleasing a couple of investors – and potentially resulting in stronger businesses, better products, more jobs, and greater confidence in the capital markets.
Micro-investing also makes investing fun, quick, and easy. Traditional investing methods usually require hours of research, tons of paperwork, and other tedious tasks. For small investors or those that are unfamiliar with the complexities of the stock market, traditional investing just isn’t the best solution. However, with most micro-investing apps like Acorns, Betterment, and Stash, investing is made as simple as signing up for Instagram or Twitter. You simply link your bank account, fill out a risk profile, and spend money like you normally would. Some platforms, like Acorns, also give you free money for inviting friends or purchasing products from their corporate partners.
Like any other investment strategy, micro-investing comes with its own set of risk. There’s no guarantee that the investment portfolio you choose will perform as you hope, and you could end up losing money. Another thing to consider is that because the investing takes place in the background, it can sometimes be easy to forget about your account.
The habit of not saving or investing could one day become a big problem for global economies. Long gone are the days of assuming that social security will be the stability needed to survive in retirement. Micro-investing technology can change that, and big financial institutions are taking notice. Asset managers including Vanguard, Fidelity, and JPMorgan have all been involved in pushing forward the idea of “fractional trading.” Those in the fund industry hope that by making it as easy to drop money into a fund as it is to buy something on Amazon, more people will see investing as part of their everyday lives.
It’s time we all start to take advantage of these new found opportunities and invest in our futures.
References
Albright, D. (n.d.). Retrieved from https://daraalbrightmedia.com/2016/08/11/can-micro-investing-technology-reverse-americas-harrowing-wealth-gap/
Investopedia. (n.d.). Micro-Investing Platform. Retrieved from http://www.investopedia.com/terms/m/microinvesting-platform.asp
Taube, S. (n.d.). Is Microinvesting a Small Millennial Trend or a Big Innovation? Retrieved from http://www.investmentu.com/article/detail/54014/microinvesting-millennial-trend-big-innovation#.WO2ReojyuuU
Williams, A. (n.d.). Retrieved from https://www.ft.com/content/080de85e-3176-11e6-ad39-3fee5ffe5b5b