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Written by Sam Pennington on November 10, 2021
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How Does M1 Finance Work For Beginners?

M1 Finance was launched in 2016 and is an online robo-advisor and brokerage hybrid designed for everyday people who want to invest in stocks or exchange-traded funds (ETFs). The platform focuses on low-cost passive investing with additional features such as automatic rebalancing of your portfolio and tax minimization strategies.

M1 Finance allows you to create your own portfolio of ETFs and stocks with no trading fees or commissions. You can also invest in one of the dozens of expert-built portfolios for free! Other platforms like Stash and Acorns offer these prebuilt portfolios, but they charge an asset management fee for this. M1 Finance is one of the only reputable investing platforms that offer expert-created portfolios for free.

What separates M1 Finance from competitors is the offering of fractional shares and automated investing features.

These fractional shares allow investors to create their own portfolio of stocks or ETFs by buying as little as 1/10,000th of a share at a time. Your M1 Finance account can be set up to automatically invest your cash balance. In doing so, M1 Finance automatically rebalances your portfolio by buying whatever you are low on.

For the first time ever, investors can build a well-diversified investment portfolio with as little as $100, or $500 for retirement accounts.

Learn More: Robinhood Retirement 3% Match

Robinhood is a popular "all-in-one" investing app.

While they are most well-known for their commission free stock trading, they've recently shaken up the Retirement Investing World too.

Introducing Robinhood Retirement; home of the biggest IRA match on the market.

Robinhood IRA Boost

Here's what you need to know:

  • Robinhood offers 2 types of retirement accounts - the Roth IRA and Traditional IRA
  • All Robinhood investors will get a 1% Match on what they Contribute or Transfer
  • Robinhood Gold members will get a 3% Match - the biggest on the market

And don't worry, this comes with a Portfolio Builder Tool. You don't have to construct your investment portfolio from scratch if you don't want to.

Lastly, you'll even get a free stock worth up to $200 when you open a new Robinhood account using our link.

Best Free Stock Promotions

Robinhood Logo1 Free Fractional Share Worth Up To $200Learn More
Webull LogoEarn Up To 75 Free Fractional SharesLearn More
Moomoo Logo7 Free Stocks When You Deposit $100+Learn More
Acorns Logo$20 Bonus When You Invest $5+Learn More

What Are The Features?

Two of the most prominent features M1 offers are tax minimization and smart rebalancing. Additionally, as previously mentioned, investors gain access to automatic investments, dividend reinvestment, and no commissions. Let's dive into a few of these features.

Tax Minimization

Using a simplified method of tax-loss harvesting, M1 Finance offers options to sell positions in the most tax-favored way.

When you withdraw money from your M1 account, they will sell assets and aim to return you to your target allocations as closely as possible.

Beyond that, they also prioritize sales in this order:

  1. Losses that offset capital gains
  2. Stocks/ETFs that result in long term capital gains
  3. Stocks/ETFs that result in short term capital gains

By doing this, M1 aims to minimize the taxes associated with your investment activity. This is not the same as tax-loss harvesting, offered by robo-advisors like Betterment. But it still has the potential to save you some serious cash without you needing to worry about manually optimizing for taxes.

Smart Rebalancing

Another feature of M1 Finance is smart rebalancing.

Using smart rebalancing, all deposits will be automatically invested into your "pie" without your manual input. If you withdraw money from your account M1 will automatically rebalance your pie so it has the correct weight of your holdings at all times.

Have you heard of the old saying "buy low, sell high?"

Well, M1 Finance will do this for you! When you add money to your portfolio, you can opt to have M1 Finance automatically invest this money. This money will be used to purchase whatever you are low on in your portfolio.

If you decide to withdraw and take money out, M1 Finance will sell whatever you are overweight or high in. This feature helps keep your portfolio balanced at all times.

Other M1 Finance Products

In addition to their investment accounts, M1 Finance also offers a few other services to individuals looking to streamline their finances. The two most popular additional products are M1 Borrow and M1 Spend.

M1 Borrow

With M1 Borrow, investors are able to borrow against their portfolio by using a portfolio line of credit. This essentially allows you to borrow money from M1 at a lower interest rate by using your investment account as collateral.

On the platform, you're able to borrow up to 35% of your portfolio's value to use for whatever you would like. You can use this additional cash to invest with, buy a car, or pay for an addition to your house.

However, if your portfolio goes down in value significantly, M1 may request that you add more funds to your account. This is very important to keep in mind if you plan to take advantage of M1 Borrow.

M1 Spend

An M1 Spend account is a fully digital checking account and debit card issued by M1 Finance. You'll be able to use this card to avoid ATM fees, earn interest, and keep your cash ready to invest on the sidelines.

Typically, when you move money into your M1 investment account from an outside bank, it will take multiple days for your funds to arrive. However, transfers from M1 Spend are instant and allow you to get your money invested much faster.

The account is available to M1 users on the free plan as well as M1 Plus. However, you'll need to be on the M1 Plus plan in order to take advantage of some of the more attractive benefits of M1 Spend like earning 1% cashback on all of your purchases.

M1 Credit Card

The M1 credit card, called the Owner's Rewards Card, is one of M1's latest features.

With this credit card, you have the opportunity to gain up to 10% cashback! When you make a purchase with a company you 'believe in,' you are awarded cashback. To 'believe in' a company means you own that company's stock. For example, if you make a purchase with Apple, and you own any portion of their stock, then you would get cashback rewards. This does not apply to index funds or ETFs.

There are currently over 70 participating companies that are separated into 3 tiers. The bottom tier provides 2.5% cashback. The second tier 5%. And the third tier, 10%. The card also offers 1.5% cashback on every other purchase.

A great feature of this credit card is that you can set your cashback to automatically invest in your pies.

M1 Plus members will get free access to this card (assuming an application is approved) while non-Plus members will be subject to a $95 annual fee.

M1 Smart Transfers

Smart Transfers allow you to create integrations and automation between the various products that M1 FInance offers. This can allow individuals to further streamline their personal finances and take even more things off of their plate.

For example, if you wanted to invest all of the excess money in your checking account every time your balance went over $1,000 you could set up a Smart Transfer for that. In order to do that, you would set up a Smart Transfer between your M1 Spend account and M1 Invest account to watch your M1 Spend account. Whenever your balance went over $1,000, it would automatically put the rest into your Invest account.

M1 Smart Transfers are available to M1 Plus accounts only.

M1 Plus Account

When you sign up with M1, you will automatically join with a free account. However, M1 also offers a premium account called M1 Plus. With this premium account, you gain access to a number of additional features such as custodial accounts, better interest rates with M1 Borrow, better cashback with M1 Spend, and the M1 Credit Card without the annual fee.

The M1 Plus account currently costs $125 per year, though they give you the first 3 months free.

Is M1 Finance Safe?

M1 Finance is a member of the Financial Industry Regulatory Authority (FINRA) and the Securities and Investor Protection Corporation (SIPC). SIPC insures your account in the event that M1 Finance goes out of business or goes financially insolvent. SIPC insures your M1 Finance account up to $500,000 in coverage ($250,000 for cash).

The platform also uses top-of-the-line cybersecurity and encryption measures to keep your account secure. There have yet to be any significant hacks of the M1 Finance platform while other platforms like Robinhood have seen multiple hacks take place.

Here's what would happen if M1 Finance went out of business.

What Are The Fees?

M1 Finance has grown a great reputation for its no-fee structure. There are no trading commissions or mark-up fees for using M1 Finance.

You may be asking yourself, so how do they make money?

M1 Finance makes money in a way similar to Robinhood, by directing order flow and offering margin to investors. They also offer a paid service called M1 Plus that comes with some added features. M1 also gives you access to M1 Borrow where you can take out a low-interest loan against your stocks. Check out our full article on How M1 makes money.

Who Is M1 Finance For?

In most cases, M1 Finance is best for someone who is a passive investor, relatively fee sensitive, and does not want to spend a significant time managing their investments. This would not be an ideal platform for active traders.

M1 Finance is also popular among index fund investors, dividend investors, and portfolio-based investors. The features are fully tailored to longer-term investors and shorter-term traders would be much better off with a platform like Webull or Moomoo.

Any individual stock investor should have a minimum time horizon of 5 years.

As Warren Buffett has said, investing in stocks with a time horizon of fewer than 5 years is speculating.

Anyone who would like to make frequent trades in and out of the market should try alternative platforms to M1 Finance such as Robinhood.

How M1 Finance Works: Final Thoughts

This modern investing platform is a great option for long-term investors of all kinds. With a wide array of features for automation and rebalancing, it makes portfolio management easier than ever.

M1 Finance also makes entry into the stock market for the first time a great deal less intimidating for beginner investors. The ability to borrow portfolios from experts offers a stepping stone to building your own portfolio for the first time.

With no fees billed directly to users and FDIC insurance, M1 is an appealing choice for the masses of Americans that are entering the stock market or who are looking for a more efficient platform.

Don't forget to grab your free stock worth up to $200 from Robinhood today!

Article written by Sam Pennington
Sam is a personal finance writer. While in college, he dedicated his spare time to learning about personal finance, investing, and real estate. Sam currently works as a business analyst for one of the top food manufacturers in the world.

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