THINK you’re too skint to invest in the stock market? Times are changing. Advances in technology have created a new trend known as micro-investing that could help you to build a sizeable pot of money for the long term.
The theory behind micro-investing is simple. If you want to save money for the long term, putting it into the stock market is likely to achieve better results than leaving it in the bank.
A Barclays’ study shows that there isn’t a single decade since 1906 where the main UK stock market index has not given investors a better return than putting the same amount of money into a bank account.
But the stock market can seem inaccessible, with stockbrokers and other wealth managers often demanding that you invest a large amount of money at once. This means that many ordinary people are missing out. Micro-investing allows you to put in far smaller sums of money into the stock market, in some cases under £1 at a time, so a nest egg builds up.
‘It opens up investment to a far wider range of people,’ says Carol Knight, chief operations officer of the Tax Incentivised Savings Association (Tisa). ‘It’s a fantastic option, because although everybody needs savings for emergencies, if you are putting money away for the long-term, investment is the best option.”
How micro-investing works
While micro-investing is still in its infancy in the UK, it is already an established phenomenon in the US and Australia, with millions of people using apps like Acorns, and Clink.com. In the UK, the Moneybox app, which launched in August 2016, allows customers to use a ‘round up’ facility. Each time they make a purchase with a linked card, the app automatically rounds its value up to the nearest pound and stashes the rest in an investment account.
Charlotte Oates, at Moneybox, says that the average Moneybox user invests about £500 a year, with tens of thousands of people using the app every week. This success is partly down to ‘nudge theory’, which suggests that you can make yourself do something that is good for you if you can make it easier for yourself. ‘Micro-investing helps you make investing part of your everyday life,’ Charlotte says.
As an alternative to the Moneybox app, investors can also try True Potential, which allows you to invest from just £1.
New rules that will force banks to open up current accounts to third parties are likely to bring new entrants into this market in the coming months. Both apps allow you to choose different investment funds based on your level of risk tolerance, with Moneybox offering three different funds labelled ‘cautious’, ‘adventurous’ or ‘balanced’.
Once you’ve linked your bank details you can invest whenever you like using the app, and you can check how your investments are performing.
A few words of warning
One of the reasons why there are still only a few micro-investment apps available in the UK is the relatively high cost of making investments.
Micro-investing apps charge you for investing your money, and there may be cheaper ways for you to cash in.
‘Once you’ve got a few hundred pounds it is worth checking whether one of these apps is still the best choice for you, as there might be a better alternative,’ adds Carol at Tisa.
She also cautioned new investors to ensure that they have a pot of cash savings before they start investing. ‘Investments are for the long term,’ she says, adding, ‘You need short term cash as well.’
Finally, it is always worth pointing out that, with investments, the value of the money you put in can go down, as well as up. While holding stocks and shares for the long term makes it more likely that they will outperform your cash savings, there is no guarantee. Micro-investors must be prepared for this.
Ten things to consider… if you want to invest in property
■ Have a clear investment strategy because it’ll determine the type of property and the area you buy in, says Sam Mitchell of HouseSimple.com
■ Be aware of the tax differences between buying an investment property to sell immediately and buying to rent, Sam adds. If you make a profit from buying to sell immediately — ie, a property ‘flip’ — HMRC classes it as income subject to tax at up to 45 per cent. If you rent then sell at a later date, any increase in value will be treated as a capital gain, not income, and will be subject to tax up to 28 per cent. The rent, in the interim, is treated as income.
■ First-time buyer? Buy for £300,000 or less, says Mark Homer, of Progressive Property. There’s no stamp duty and you can rent out rooms to pay the mortgage.
■ Find a one-bed flat with a separate kitchen, Mark adds. Make a kitchen in the lounge and turn the other kitchen into a second bedroom. You will add at least 20 per cent to the property value.
■ It’s very hard to make leasehold buy-to-let profitable with all the additional costs (service charges,ground rent) so stick to freehold, says Sarah Gillbe, at Setfords Solicitors.
■ Avoid student accommodation and house of multiple occupancy (HMOs), Sarah adds. They are much more time-consuming to manage and harder to get a mortgage on.
■ The commercial property market can be a good option because of tax benefits tied to interest and depreciation, with historically strong returns (average annual return: 9.5 per cent over 20 years), says Frazer Fearnhead, of The House Crowd.
■ Short-term lets can deliver higher returns through flexible rental solutions, says Nakul Sharma of HostMaker. They don’t require any change in planning, unlike traditional buy-to-let properties.
■ Be aware that you may have to pay an extra three per cent stamp duty if it’s a second property, says Alexander Vine of thelondonbroker.com.
■ Focus on finding deals that are below market value, where the seller needs to move quickly, or if the property is in an area to benefit from future regeneration, says Javed Khattak of Zisk miniProperties. SARAH EWING