Micro-investing

What It Means

Micro-investing means putting small amounts of money into investments on a regular basis, often a few dollars at a time. FINRA notes most people who do it use mobile apps built for the purpose. Because a few dollars rarely buys a whole share, these apps usually rely on fractional shares, which let you own part of one share of a stock or ETFETFAn exchange-traded fund: a pooled investment fund whose shares trade on stock exchanges throughout the day at market prices. See more.

How People Say It

• "I put five bucks a week into the app."
• "I own like a tenth of a share of that one."
• "The monthly fee is more than it earned this year."

The Breakdown

Formula

Fraction of a share = deposit ÷ share price. Fees as a share of what you put in = monthly fee × 12 ÷ yearly deposits × 100.

Worked example. Lena invests $5 four times a month through an app into an ETF priced at $250 a share. Her app charges an example fee of $1 a month. These numbers are examples.

What the result means. A flat monthly fee weighs heavily on small deposits. Here, $12 in fees is 5% of the $240 Lena put in, so her investments have to rise 5% before she's even. Doubling her deposits to $1010,000 stepsA popular daily step goal that began as the name of a 1960s Japanese pedometer; later studies find health benefits begin well below it. See more would cut that to 2.5%. FINRA points out that some apps charge no commissions and others charge commissions or monthly fees, so the fee schedule is the first thing to read.

What moves the number. Bigger or more frequent deposits spread a flat fee thinner. A fee-free app removes this cost, though the funds you buy still carry expense ratiosExpense ratioThe yearly share of a fund's assets used to pay its running costs, so a 0.40% expense ratio costs $40 a year for every $10,000 invested. See more.

Good to Know

FINRA and the SEC flag two limits of fractional shares. You may not be able to move them to another brokerage firm, so switching apps could mean selling first, which can trigger taxes and fees. A fraction also might not come with shareholder voting rights. Investments bought through an app can lose value, and they aren't bank deposits, so FDIC insurance doesn't apply. Check that the app's brokerage is a SIPC member, which protects against the firm failing but not against market losses.

Related Terms and Categories

• Round-up savings

  A banking or app feature that rounds each card purchase up to the next dollar and moves the spare change into savings or an investment account.

• Dollar-cost averaging

  Investing the same dollar amount at regular intervals no matter what prices do, so each payment buys more shares when prices are low and fewer when high.

• Brokerage account

  An account at a brokerage firm that holds your cash and the stocks, bonds, funds and ETFs you buy and sell through that firm.

• Robo-advisor

  An online investment adviser that uses computer algorithms to build and manage a portfolio for you from your answers to a questionnaire.

• ETF

  An exchange-traded fund: a pooled investment fund whose shares trade on stock exchanges throughout the day at market prices.

• Expense ratio

  The yearly share of a fund's assets used to pay its running costs, so a 0.40% expense ratio costs $40 a year for every $10,000 invested.

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