Given the huge publicity around the recent GameStop (GME) fiasco, more and more individuals are looking to get involved in the stock market. For any beginner, this can be a daunting task. With hundreds of brokers and thousands of stocks to choose between, it can be hard to decide how exactly to get your foot in the door.
But in recent years, several smartphone apps have launched claiming to offer effortless investment options. Are these investment apps worth it? And which is the right one for you?
Are investment apps worth it?
The key to growing your investments is consistency. If you're able to invest $500 a month and match historical stock market returns of around 10 percent a year, then you would be a millionaire in 30 years despite only putting away $180,000 of your own money.
This growth is down to compound interest and dollar-cost averaging. Compound interest is the interest you earn on returns from your investments. Dollar-cost averaging is a less risky way of putting your money into the stock market and involves investing smaller amounts of money regularly—ignoring stock market highs and lows and consistently purchasing assets eventually averages out your cost over time.
Robo-advisors and investment apps that automatically invest money for you over time can be a great way to achieve the above. For a small fee every month, these apps can invest in the stock market for you, taking most of the work out of being consistent—you just need to set up a deposit and forget about it.
Best investment apps for beginners
So, which investment apps are best for beginners? It seems as though there's a new investment app every month, but let's go through some of the best options for those just getting involved in the stock market.
Wealthfront is a robo advisor that claims to "make more money on all your money, with no effort from you." Users can choose between many different index funds or mutual funds to passively invest their money. Vanguard's S&P 500 (VOO) exchange-traded fund (ETF), for example, boasts a 13.45 percent compound annual return over the last ten years, though this does not indicate future performance. For just a small fee of 0.25 percent, plus the additional fees of the funds you invest into, Wealthfront is a great way to grow your wealth passively.
Robinhood was at the center of controversy recently when they decided to suspend the trading of stocks like GameStop and AMC. Putting all of that aside, however, Robinhood can be a great option for new investors. Robinhood charges no fees on trades, instead making their money by passing orders to a high-frequency market maker that pays the company a small commission.
If you're investing in ETFs, you'll still need to pay those fees, though these are usually quite small. Robinhood has a friendly user interface that's easy to navigate for beginners on top of all of this.
Round works with fund managers like Guggenheim Partners, Doubleline, and Gabelli to offer individuals investment options that are usually only available to institutions with huge capital. While their annual fee of 0.5 percent is double that of Wealthfront, Round will waive your monthly fees in the event of a negative return. This encourages Round to only select investments they believe will offer a return.
Betterment is another robo advisor similar to Wealthfront. Just like their competitor, Betterment charges 0.25 percent annually for its investment accounts. That fee comes down to 0.15 percent if you have over $2 million invested, though that isn't much of an incentive for new investors. For a slightly higher fee of 0.4 percent, Betterment offers unlimited calls and emails to their investment professionals and other benefits, which can be great learning opportunities for those who are just starting out.
Acorns is a great option for younger investors with less money to invest. The app offers a "spare change" tool that automatically rounds transactions up to the nearest dollar and invests the change into ETFs. Acorns also offer flat fees of $1, $3, and $5 a month, which can offer great savings for those with bigger balances. However, for those with smaller portfolios, fixed fees can often be more expensive.
How investment apps help beginners
As discussed above, investment apps are great for automated investing. Investing in the stock market consistently over a long period of time can lead to massive returns, and the sooner you get started, the better. Setting up a direct deposit and forgetting about it is one of the easiest ways to do this.
Investment apps also offer a range of mutual funds and index funds for their users to invest in. These bundles of stocks give investors easy exposure to hundreds of companies in dozens of markets. Investing in single companies comes with a lot more risk than investing in a diverse range of companies and industries—especially for beginners.
What beginner investors should watch out for
If there's one thing that we've learned in recent weeks, it's that the stock market can be incredibly volatile. In the space of a few days, shares in GameStop rose nearly 2,000 percent and then came plummeting back down. While this is an extreme example, the stock market as a whole will have ups and downs, and new investors need to be prepared for this.
When markets plunged last February amid the coronavirus pandemic, many new investors withdrew their money at market lows out of sheer panic. Now, nearly a year on from that crash, markets worldwide are at all-time highs, and those who stuck with it and continued to invest throughout the downturn, are enjoying large returns. While seeing a huge loss on your screen can be terrifying, markets typically rebound, especially when you're invested in a broad range of stocks.