You want to buy some stocks, but you're low on dough, so you're wondering if you can swipe the credit card for some shares.
Or you want to trade and see what you can make of it, but you don't have enough capital to fund a trading account.
The answer is yes, you technically can. But there's a specific way you'd have to do it. And you should also ask...should I use a credit card to buy stocks? Especially if there's a better way?
How to Use a Credit Card to Buy Stocks
In the past, some brokerages allowed you to use a credit card to buy stocks directly. But, those companies realized that was a bad idea, and they stopped doing it.
Now, if you want to buy shares of stock with a credit card, you have to use a cash advance.
Cash advances are a risky tactic and come with their own costs (covered below). But, they're a quick way to get a few thousand dollars or more into your bank account.
You can...
- Use an existing card with no cash advance promotion (worst option). OR
- Wait for an existing card to send you a cash advance offer that gives you a period of 0% interest for x months. OR
- Apply for a new card that comes with a cash advance promotional offer.
For number 2, if you have a balance on the card already, you definitely don't want to do this. That balance and the interest on it will continue to compound. That's because payments would stop going towards your interest-charging balance and go towards the 0% interest balance instead.
What You Should Know Before Buying Stocks with Your Credit Card
This isn't free money, it comes with strings attached. The factors below stack up to make it pretty clear you shouldn't use a credit card to buy stocks or fund a trading account. Whether you do it or not, you need to understand all of this.
Cash Advance Fees
Each cash advance transaction has a one-time fee in addition to interest. That fee may be 3-5% or higher. On a $10,000 cash advance, you might pay $500 or more up front to get the cash.
Again, that fee is separate from any APR interest.
Interest Rate Expense
If you have a promotional rate for x months, you won't be charged interest during those months. At the end of that period, you're charged interest every month, based on your cash-advance APR.
The cash advance APR is usually at the higher end of what's allowed (27-36% from most banks for US customers). If it's shady like a title-loan or payday-loan company, it could be 70% or more.
Can you earn 36% a year easily? How about 70%?
...Because that's what you're signing yourself up to do, just to break even!
If you don't have a promotional rate, you're charged the cash advance rate every month, from day 1.
Every month, interest will be charged and added to your debt balance.
Minimum Payments
Minimum payments are due every month, whether you make a profit or not.
Every month, you have to pay your cc bill, which means you either have to
- Withdraw the money from your trading account, or
- Come up with that money from somewhere else.
Even if you think you can overcome the fees and interest rates with your trading, this can easily bite you on the ass.
Consider a realistic example scenario:
Example of Using a Cash Advance to Buy Stocks
You take a cash advance for $10,000. After the fee, you actually get $9,500*. You won't yet know your minimum payment amount, but it's safe to assume it will be $300-500/mo depending on your credit rating.
You deposit the $9,500 in your account. You buy $9,500 worth of stock with it.
Over the next 30 days, that stock goes down 10%. This isn't rare, it happens often.
Now your stock is worth $8,550, and your minimum payment is due, $500.
You withdraw $500 to make the payment, so now you have $8,050. $1,450 less than where you started.
You now have to make 18% in the next 30 days just to get back to where you started! And then you'll have to make another payment!
Once you add interest, this only gets worse.
*I showed 10,000-500 = 9,500 to make it easier to follow. In reality, you would have to do more math. You will have to calculate your fee and make sure you have enough available credit for the cash advance and the fee. In this case, $10,000 +$500, so you need $10,500 of available credit to get $10K. If you have $10,000 available credit and you want the max, you have to work backwards to get that amount. That equation looks like 1.05x = 10,000. This gives you an amount of $9,523.08. If you're going to do this, round down a few bucks just to make sure you don't go over your available credit and get penalized.
Make Sure You Can Pay
We've pretty well established that you shouldn't fund your trading with a credit card. But if you're going to do it (or even if you don't do it) you should make sure you have some other income with which to make your minimum payments. Think about it before you quit your job to trade.
Don't Get Scammed
If you're considering this because someone solicited you to buy a stock, run away. Run like hell, right now.
Fraudulent stock scammers (think Wolf of Wall Street) don't care how you pay, and will gladly take a credit card. That's because they're just stealing your money.
If you got a call, email, or text message about some stock, just delete it. Feel free to look up the stock symbol for research purposes (to see what a pump and dump stock looks like) but otherwise ignore it.
Superior Alternatives to Using a Credit Card for Trading
Want a better alternative to trading with funds from a credit card cash advance?
What if you could trade using someone else's money, but without paying interest and going into debt?
This is where prop firms come in, specifically online prop firms. Prop firms, also known as proprietary trading firms, provide capital to traders who qualify. You have to qualify through a trial trading simulation, which can be a challenge, but that's trading.
The good thing with online prop trading is, you only risk the fee that you pay for that trial.
Prop trading has been around for a while, but recently the online firms, also known as trader funding companies, have made it more accessible than ever.
Note: There are currently no online prop firms that offer stock trading. The reputable ones offer futures trading, which suits most traders. If/when you make profits and withdraw, you can use that money to buy individual stocks in your brokerage account if you want.
Warning, avoid the forex firms offering "stocks" or "shares". They're not actually letting you trade stocks, they're offering CFDs which are illegal in many countries. You won't want to trade them if you know how they work. Read more about futures vs forex here.
Conclusion
Although you can buy stocks with a credit card by taking a cash advance, you really shouldn't. There are too many factors working against you. If you really want to trade, but don't have much money to put in, consider the lower-risk alternative of trying to earn funding with a prop firm.
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