Have you ever thought about Demat accounts and trading with a credit card? Traditionally, traders use their bank balances to buy and trade shares or stocks in the companies they want through their respective brokers.
But there are many advantages to using credit cards to buy and sell the same stocks. Want to know how it happens? Read on.
Buying stock
Introduction to credit cards
Credit cards are different from the traditional notions of plastic money. While most of the world still uses debit cards, credit cards are also rising. While debit cards use the balance that is already there in your bank account, credit cards spend money that you don’t actually have at the moment. When you use your credit card, you are actually using the credit that a bank or financial institution is offering you. How do you pay that back? When your billing cycle with the bank or financial institution (typically a month) ends, you are presented with a bill or a credit card statement.
This credit card statement encompasses all your expenses using that card. It also gives you a reimbursement period during which payments can be made to the bank or financial institution by you. However, if you do not pay the credit card bill during that reimbursement period, the bank or financial institution charges interest on the remaining amount. The longer the amount is left unpaid, the larger interest you have to pay on the outstanding amount.
The rates of interest charged are dependent on the financial institution that has given you the card. There are offers available to customers who have great credit scores. Customers who have great credit scores can get credit cards at a much lower rate of interest. This affords them more flexibility with regard to the purchases and payments they make.
Stocks and shares’ trading
Trading usually takes place using bank accounts and the respective brokers of the investors. When you decide to buy a piece of a company in the form of stocks and shares in the company, you have to pay a certain amount. If you choose to make the payment through your credit card without using the money that you have in your bank account, it can have great consequences. However, there are certain things you have to keep in mind before you do that for yourself. Before buying stocks with your credit card, you have to take note of the card’s risks, fees, and dozens of other factors that go into determining the risk. Here, it is not just about maximizing your points. It is about taking a serious financial decision that can get you great returns if you handle it right.
Here are some things that you need to take care of before you start trading with your credit card.
Investment fees
Buying stocks with your credit card comes with a lot of extra fees, sometimes. Usually, there are applications like Stockpile that allow you to buy stocks with your credit card with a 3% transaction fee. But that is not the only fee that you have to worry about. You may also have to pay some cash advance fees, late payment fees, and sometimes, interest fees when you have not paid off your balance completely.
Paying your card off completely
This is one piece of advice that you must keep in mind. No matter what purchases you make with your credit card, it is very important that you pay it off every month at the end of the billing cycle. Your short-term gains usually mean nothing if you’re regularly charged with a 25% percent fee in the form of interest. If you are investing for the long run, you have to be aware of the long-term consequences of your interest pile up and plan your investments accordingly.
Tax implications
Your card issuer might raise some red flags if you start buying stocks with your credit card. During these tough economic and financial times, you must make sure that you manage your financial risks well. Stock purchases are usually termed as a high-risk and high-return investment. Hence, you might have to shut down your credit card for good if you get too greedy for points. Large purchases of stocks on your credit card might have a negative impact on your credit. Large purchases can drastically increase your utilization rate (for credit available) and drive your credit score low. This might also make it more difficult for you to pay back that amount at the end of the billing cycle.
Conclusion
There are, as you can see, many advantages of buying stocks with your credit card. You don’t have to worry about insufficient funds, risky investments, and paying off the money you don’t have at that instant. With your credit card, you can gain a significant advantage over your fellow investors. However, there is one caveat. The usage of the credit card must be extremely responsible. If you become reckless with the usage of the credit card, you might have to face heavy charges and interest, most of which is added to your credit card bill. Once you default on your bill, it becomes a habit. It is always a smart move to pay your balance in full every single time. As long as you keep these tips in mind, credit card trading and stock purchases are an excellent option. Good luck!
