The Rise of Micro-investing Apps and Their Risks
To me, a 21 year old young adult, access to shareholding has always been shrouded in mystery. It seemed far-flung, needing fees of $10 per trade, and needed way too much time and commitment. I was scrolling through a Facebook group which aimed to help women manage their finances, when I stumbled upon micro-investing apps.
Micro-investing apps allow you to deposit small amounts of money for a cheap and convenient way to build an investment portfolio.A shareholder is an individual who owns a one or more shares in a company. A single share represents fractional ownership of the corporation in relation to the total number of shares issued. It is a way of accessing a company’s earnings through payment of income and dividends.For companies, it is a way of financing their operations.
In Australia, CommSec started in 1995, and launched a website in 1997. They initially only offered Australian equities, but has expanded into derivatives, international equities, managed funds, super funds and others. In 2008, CommSec became the first Australian brokerage firm to offer an app,CommSec Pocket.
ASX have witnessed a stream of younger investors into investor participation in the last two years. They are aged between 18 to 24, and make up a quarter of transactions of securities exchange within the last 12 months. Investment app usage in 2020 has seen the Australian big four banks losing their customers to new competitors in the market. Robinhood, a US-based stockbroking app which allows customers to invest as little as 1 cent has grown to $7.6billion USD as of 2019. A $1,700 Amazon stock, is up for grabs for as cheap as $1 for a fraction of their stock value. According to it’s co-CEO Vlad Tenev, the app abides by values of “participation is power”.
Meanwhile in Australia, CommSec has paved the way for the rise of investment apps such as Raiz and Spaceship.
What else made this possible?
Globalisation has witnessed billionaires being celebrated in their media. Jeff Bezos, Elon Musk and Jack Ma have become the new rockstars of the 21st century. In the age of information, us youngsters are intrigued by the amount of wealth amassed by corporations listed on stock exchanges around the world, and aspire to be a part of it.
The rise of fintech popularised micro-investing. Traditionally, you needed a minimum of $500 to start investing, excluding brokerage and processing fees. Accessing foreign shares such as China’s A shares required contacting a brokerage firm and you had to undergo a vigorous process alongside a larger minimum investment. Plus, there are various risks associated with buying foreign shares, such as currency volatility, transaction costs, different regulations and taxation implications and liquidity risks associated with international custodians. These would require a tremendous amount of research, and consistent monitoring of current events throughout the world.
Thirdly, the Covid-19 pandemic triggered events which saw market volatility throughout the world. This forced everyone to confront the need for wealth creation due to vast financial uncertainty about the future.Micro-investing offers a stepping stone for people who have limited income to become beginner investors.
Apps such as Raiz and Spaceship Voyager fills the much needed gap in the Australian market.
Spaceship offers two different unit trusts, Universe Portfolio for 100 international and Australian consumer based companies, the other one is the Index portfolio comprising of 100 of the largest Australian and international companies. The benefits of this app is the research and selection is already done for you, and fees only start when you have a balance of over $5000. The risks are distributed broadly due to the investment in so many different companies.Investing in a range of companies in different sectors whose performance is not strongly correlated can help mitigate losses.
Full disclosure, micro-investing, like all types of investing, isn’t perfect. When a girlfriend started using Spaceship, her father cautioned her “Whatever amount you invest, be prepared to lose the entire amount.” Economic uncertainty associated with global affairs will be magnified in the form of market risks.Negative returns are certain in the duration of your investment. Meaning the balance in your Spaceship Voyager account may be less than what you put in.
Similar to conventional shareholding, changes in inflation impact the value of your investment as inflation reduces the purchasing power of assets and income over time. An increase in interest rates also risk erosion of the value of your investment.
International companies are also susceptible to exchange rate movements. Passive Bets pointed out the lack of currency hedging fails to mitigate the impact of currency volatility. When foreign currencies fall in relation to the Australian dollar, this will detriment investment returns. Moreover, shares are nowhere near as liquid as cash. In the event where you were to need cash on a timely basis, your units in Spaceship Voyager will take some time to be withdrawn and converted to cash which may result in loss of it’s original value. Lastly, a company could go bust and you could lose your investment. Spaceship may choose to suspend redemptions to protect investors.
To summarise, micro-investing apps offer accessibility for beginner investors who don’t have a lot of disposable income or free time. It is a nifty way to ensure some earnings. However, we should always be conscious of how much we can afford to lose in relation to our lifestyle.
