What is a Micro-Investing Platform?
A micro-investing platform is an application that eases the process of investment by enabling users to save and invest small amounts of money periodically. Micro-investing platforms are different from conventional investment schemes in the sense that there is no minimum limit on the amount that can be saved. Also, they charge nominal brokerage and subscription fees, unlike conventional investment schemes.
- A micro-investing platform is an application that eases the process of investment by enabling users to save and invest small amounts of money periodically.
- Some of the micro-investing apps allow fractional investing, that is, buying a fraction of a share. Others require the user to link their bank account or debit card. Thereafter, the app rounds off each purchase made into the next highest integer and diverts the spare change to the user’s investment fund.
- Micro-investing platforms offer easy and profitable investment to users who lack knowledge of financial markets, as well as inculcate saving habits among people.
How Does Micro-Investing Platform Work
There are numerous apps that provide micro-investing services, but each works differently than the others. However, there are two broad ways in which they function. Some of the apps allow fractional investing, that is, buying a fraction of a share.
The stock market does not allow fractional investing, but the apps purchase an entire share and divide it into fragments for their users. With the money that they’ve saved, people can buy fractional shares in case they cannot afford an entire share.
Other apps require the user to link their bank account or debit card. Thereafter, the app rounds off each purchase made into the next highest integer and diverts the spare change to the user’s investment fund.
For example, let’s assume that Person A linked their debit card with a micro-investing app. Every morning, they buy coffee worth $2.50 from a cafe. When their card is swiped in the machine, $3 is deducted from their bank account. The remaining 50 cents are automatically deposited in their investment fund. The amount is quite small, but over a period of time, the regular deposits will add up to a considerable sum.
Benefits of Micro-Investing Platforms
Traditional investing platforms, like fixed deposit schemes or stock markets, impose certain conditions on their users, such as establishing a minimum amount for a deposit to start with or stipulating regular additions of fixed sums of money into the scheme. However, not everyone can afford to do so.
Lower-income individuals or people with irregular incomes who cannot put together $100 at a time need a convenient alternative method of saving. Micro-investing platforms allow users to build their savings without worrying about raising large amounts. It offers the following benefits to users:
1. Inculcating a saving habit
Setting aside a couple of dollars every other day or letting a few extra cents debited from one’s bank account is not a major expenditure. However, over a prolonged period, it can add up to a considerable sum. It develops a lifelong saving habit in people without making thrift a compulsion.
Money can be saved at the click of a button. There is no need to fill out long forms, open Demat accounts, or follow any other lengthy process associated with conventional platforms.
One does not need a strong cash balance or valuable assets to start a savings account. Daily or bi-weekly deposits of spare change are all that is required for one to build up a steady saving.
4. Ease of investment
Since the entire process of saving and investing is automated, the money that users save is automatically invested in diversified stock portfolios that offer a good rate of return. Users do not need any prior knowledge of financial markets and investment techniques.
Micro-investing is specially targeted towards technology-driven youth who wish to accumulate steady savings but lack the funds to do so. The applications gained more popularity after the Global Financial Crisis of 2008 when people lost all trust in the stock market.
Investing in small amounts over several years builds up a substantial sum of money, but the returns gained from micro-investing must be weighed against its related costs.
An individual can choose between two options when investing money. The first option is to save $10 monthly on a micro-investing platform that charges a $1 monthly subscription fee. The money collected at the end of the year is then invested in a portfolio that offers a 4% return per annum.
The second option is to deposit $120 in a fixed deposit scheme for one year with a one-time charge of $6 and a rate of return of 5% per annum. Calculating the amount of his savings after one year:
In fact, for persons who wish to build a substantial investment, micro-investing is probably not the best option. Although it does build up considerable savings in the long term, after accounting for inflation and other costs, the value of the savings in the future declines considerably.
In such a case, it would be more profitable for the person to save a large sum of money and deposit it in a traditional fixed deposit account. It need not always be the case, but whenever one is considering between two investment options, it is always better to calculate the net returns.
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