Micro-investing refers to two different types of investing. The first involves putting small amounts of money into stocks, ETFs or other securities, rather than large lump sums. The other refers to buying stocks with extremely small market capitalizations.
Whereas the first can be a great way for new investors to get involved in the market, the second can be a highly risky choice that can cost you everything that you put into it.
Here’s a look at the two types of micro investing, who they might be appropriate for and the risks that are involved.
Micro-Investing: Investing With Small Amounts
In its simplest form, micro-investing is a great idea, particularly for those just starting out. Probably the single most important step in your entire investing career is to get started, so setting aside a few dollars or even a few pennies is a great way to get into the habit of putting money away for your future.
Using Micro-Investing Apps
Once you get started with micro-investments, it’s best if you automate your contributions. Even when investing small amounts, it’s easy for life to “get in the way” and divert your cash flow away from your investments. The traditional way to accomplish this is by setting up regular transfers from your bank account to your investments. A more modern way is to use a micro-investing apps like Acorns, Robinhood or Stash.
Micro-investing apps can not only make regular transfers from your checking or savings account to your investments, they can also “round up” purchases you make and invest the excess for you. For example, if you make a purchase for $5.67, you can set up an app to round it up to $6.00, with the extra $0.33 going towards your investments.
Is Micro-Investing With Small Amounts a Good Idea?
It’s important to remember that while micro-investing is a good start, it will usually take more work on your part to build a long-term wealth creation plan, particularly if you start later in life. Saving a few cents a day only amounts to perhaps a few hundred dollars per year, and that won’t cut it if you’re looking for a seven-digit portfolio by the time you retire.
Micro-Investing: Investing in Tiny Companies
One of the ways that companies are divided is by market capitalization, which is calculated by multiplying the number of outstanding shares of stock by the current market price. Micro-cap companies are generally defined as having market caps between $50 million and $300 million.
While this may seem like a large company — and it certainly is when compared with your local mom and pop store on the neighborhood corner — in the world of publicly traded companies, that size is incredibly tiny. Apple, for example, trades with a current market capitalization of about $2.6 trillion. When compared with even a “large” microcap with a $260 million market cap, Apple still trounces it in size by a factor of 10,000 to 1.
How Microcaps Differ from Bigger Companies
The size difference alone is one way that you can tell that investing in a company like Apple is very different from investing in your average microcap. By investing in a tiny company, you are ratcheting up both the risk and the potential reward in your portfolio.
While you can certainly make money investing in micro stocks, you should think of that as more the exception than the rule.
Is Micro-Investing in Tiny Companies a Good Idea?
Investing in microcap stocks can offer significant gains, but you could just as easily lose your entire investment, so it’s important to invest cautiously.
By their very nature, microcap stocks are more volatile than their larger brethren, if for no other reason than they are much more illiquid. Since far fewer shares trade hands every day in the microcap world, both gains and losses tend to be magnified.
As microcaps aren’t generally followed by any prominent Wall Street research firms, it also means their prices can be manipulated more easily by touts and promoters on message boards and other news outlets.
How Can I Start Micro-Investing?
Thanks to advances in financial technology, it’s easier than ever to start a micro-investing program. In addition to the “roundup” apps that put your excess change into investments, most major online brokerage firms now have systems that can process even the smallest of trades.
Charles Schwab, for example, offers its “Stock Slices” program, in which you can invest as little as $5 into select stocks from the S&P 500 index. Other firms allow the purchase of fractional shares of stock as well.
Pay Attention to Fees
It’s important as a micro-investor to keep a close eye on fees, however. While most brokerage firms now charge $0 commissions for both stock and ETF trades, many of the “roundup” apps do come with small monthly fees. If you’re only investing tens of dollars per month, even a monthly fee of a few dollars will eat up your profits.
Create an Account
In terms of investing in microcap stocks, all you need is a brokerage account to get started. You’ll want to work with a zero-commission broker when investing in microcap stocks for a number of reasons, not the least being that you’ll already be paying more for your trades due to the wider spreads that come with illiquid securities.
Microcap stock investors also tend to be more active traders, so you’ll want to keep your costs to an absolute minimum.
Is Micro-Investing a Good Idea?
Investing even small sums of money is a great way to learn how stocks and markets work, and it’s a good first step towards a lifelong investment program. But on its own, it’s not likely to make you rich. Once you get comfortable with investing, you’ll want to divert larger sums to your investments, taking advantage of accounts like 401(k) plans along the way.
Microcap investing is not for everyone. While some small stocks can catch fire and double or even triple in a short period of time, many others end up being long-term losers, even going bankrupt. Generally, microcap investing is best left to experienced investors that have firsthand knowledge of the companies they are buying and selling. Those looking to simply flip stocks and make a quick buck are likely to get burned at some point.
FAQHere are some quick answers to common questions about micro-investing.
- Can you make money with micro stocks?
- You can make money with microcap stocks, but it's just as easy to lose money. While your small investment might double or even triple or more if the company does well, you'll lose it all if the company fails.
- You'll also find it harder to sell the stock if the company starts doing poorly, because microcap stocks are less liquid than shares of bigger companies.
- Is micro-investing profitable?
- Micro-investing can be profitable, though it is less so than investing larger amounts that end up successful. However, if your investment doesn't do well, you won't lose as much if you opt for micro-investing.
- All stocks come with different levels of risk and reward, so it's a good idea to consult a financial advisor to determine your best strategy.
- What are the risks of micro-investing?
- Aside from the potential of losing money on a failing company – which is a risk with all stocks – the biggest risk of investing only small amounts is that you won't end up with as much profit if your investment does well. If you only micro-invest, you might not end up making as much as you'd like.
- Microcap stocks come with their share of risks, as well. Smaller companies are less established and more likely to fail, which increases your risk of losing everything you put in.