The Dark Dirty Secret of Microinvesting

Microinvesting makes the stock market more accessible to everyone, but that may not be best for everyone.
If you haven't yet learned about microinvesting you should check it out. But beware of apps that charge you money. Investing in the stock market is already risky. Why pay fees if you don't need to? Microinvesting consists of depositing small amounts of money into an investing account. That's the short explanation but there's a little more to it. Depending on which microinvesting tool you use you may get to decide where the money is invested. There are some pros and cons to microinvesting.

For a quick rundown of the top apps on the market, check out Top Ten Topia's introduction to microinvesting apps. I'm not going to discuss all the apps. We've started using Robinhood because it's free. So the rest of this article covers my thoughts on the pros and cons of microinvesting. Let's start with the good stuff.

Pros of Microinvesting

Most of the microinvesting options I looked at eliminate the per-trade fees. With a normal brokerage account you can pay anywhere from $5-10 per trade. If you want to buy shares, you pay a fee. If you want to sell shares, you pay a fee. The fees add up and they are the best reason why you want to use a buy and hold strategy.

With microinvesting you can trade in and out of positions more freely. But the trades won't be executed right away so if you're thinking this is a way to start day trading, don't get your hopes up. Free trading is important.

Another good thing about microinvesting is that some of the apps allow you to buy fractional shares. Normally you can only do this with DRIPs (dividend reinvestment plans). If you want to buy a piece of Berkshire Hathaway, the most extensive stock in the world, now you can do that. Just pick the right app.

You can trade from your smartphone with all the microinvesting tools I looked at. Robinhood has an app and a desktop website.

Most of the apps have no minimum balance requirement. That's important. But if you buy their premium services they'll have some conditions. Don't mistake the light requirements on the free services for the conditions of their premium services.

Cons of Microinvesting

Some of the services require you to make purchases through their apps. They round up and transfer the extra money to your savings/trading account. There's nothing wrong with this model. It makes you feel like you're spending more money for basic items like food and gas but that's okay. Maybe you'll be a little tighter with your money.

I just like to have control over my money. Robinhood allows me to transfer money when I have it available. We haven't invested much with Robinhood because we have a brokerage account with an older service. But we're thinking about closing that account and moving our money over to a different broker. We would put some of the cash into Robinhood.

Some of the services limit your investment options. A couple of them require you to put your money into their special funds. This makes sense because buying and selling stocks still costs money.

Because you're getting free trades there is a delay between the time you place an order and when it's executed. You may pay more per share than you expect and you should plan for that. It's a good idea to use stop-loss orders. They'll execute within the limits you set so you don't pay too much or sell too low.

So What Is the Dark, Dirty Secret of Microinvesting?

Think about it. You're being invited to trade on the stock market for free. That's a very powerful temptation. Finally the world of big finance is accessible to anyone regardless of how much income they make.

The last time there was a financial revolution like this was the 1980s when 401(k) plans became all the rage. Companies dropped their expensive pension plans for employee-funded 401(k) plans. Most of us had no idea of how to invest in the stock market. People lost billions of dollars. When the 2000 crash and the Great Recession of 2008 came millions of people lost their life savings.

If you think microinvesting won't go through something like that you're setting yourself up for a very sad shock. I predict there will be problems with microinvesting, probably when the next recession sets in. People may not anticipate the taxes they'll have to pay on the stocks they sell. Or maybe they'll begin panic selling, overwhelming the microinvesting services.

Try Microinvesting, But Be Careful

Don't let it go to your head. The same rules of investing still apply to microinvesting. The less you think about your money the longer it will have to grow in value before you do something stupid.

Really, that is what a lot of investing seems to work out to.