Update(5/11/2014): Loyal3 now limits credit card purchases of stocks to $50. So you can still use it to MS but it isn’t a viable option if you’re looking to do more than $1-2k.
It’s easier than ever to invest your money in stocks these days. Not only are companies battling it out when it comes to lower fees and expense ratios but lately we’ve even seen a rash of companies that are allowing individual investors to buy and sell stocks with zero trading fees. Obviously there are hidden costs behind the scenes like bid/ask spreads and buy/sell ratios but even those expenses have gone down as trading technology has gotten better and faster in the last decade.
Personally, I don’t invest in many individual stocks although I know many people do. The reason why I don’t do it is because of the uncompensated risk. When you invest in big companies like Coca-Cola, Walmart, etc, your expected return is the average of the market(but these big boy stocks essentially are the market), yet you’re taking on additional diversification risk. Instead, I invest in low cost index funds that eliminate this diversification risk by owning multiple stocks and return very close to the average. So in short, same return, less risk. That is simple math, but most people don’t invest using math.
Fee Free Stock Investing
I’ve heard of a few companies starting to offer fee free stock investing but since I don’t do it very often I never really paid attention, until now. I’ll explain why I’m so interested in Loyal3 later but right now let’s look into how they can offer these services for free. When it comes to investing, if something sounds too good to be true, it usually is. So what’s the deal with Loyal3 and how do they make money?
We know that Loyal3 isn’t giving us $0 commission trades out of the kindness of their heart but there aren’t any fees that I can see being charged to buyers. From everything I’ve read, there are a couple ways they make money though. It’s a little murky but they do state the following on their own website:
… companies that pay or have paid fees to LOYAL3 in exchange for services for certain offerings. The offerings include Social Stock Plans, as well as IPOs and follow-on offerings we have underwritten, each of which was subject to a prospectus and registration statement filed with the SEC; and for certain non-offering services such as reducing company expenses for retail shareholders and increasing brand engagement, which are subject to either a prospectus or LOYAL3’s Terms and Conditions.
So what that all means is that basically Loyal3 has partnerships with certain companies that they work with and those companies are the ones that pay them. They are also venture capital funded and in my estimation, that’s what’s paying for a majority of their operating expenses. A lot of these tech/finance start-ups receive insane amounts of venture capital money and often don’t return a profit for years. Ultimately though, I’m sure they have a plan in place to make money and it’s going to be through partnerships with certain companies and IPO’s.
How Does Loyal3 Work?
I haven’t bought and sold a share with Loyal3 yet but I plan on trying it out over the next couple weeks. Here’s everything you need to know about investing with Loyal3:
- You can buy shares with a credit card: This presents a unique opportunity for someone like me who’s constantly trying to manufacture spend for credit card bonuses. You can use a card like the Barclay Arrival and get an instant 2.2% profit on every trade – that’s not a bad deal.
- You can trade fractional shares: If you want to own a piece of Google for example, normally you’d be forced to fork over a thousand dollars for just one share. But with Loyal3, you can buy a fractional share of Google for only $10.
- Stock Availability: Currently there are 55 different stocks(as of 3/22/14) offered on Loyal3’s platform and nearly all are megacorps like Amazon, Google, Walmart, etc.
- Trades are not real-time: Normally when you buy or sell a stock it’s executed in real time or within a few seconds. But Loyal3 uses batch processing in order to cut down on transaction costs and that means that they only buy and sell a stock once a day. So at the end of the day, they’ll take all of the orders to buy Amazon and make one large purchase and divvy up the shares accordingly. I think eventually this aspect of the business will have to change since markets can fluctuate wildly within even just a few hours and most investors won’t want to be left in the dark on their buy/sell order.
Buying Shares With a Credit Card
This is the part about Loyal3 that really interests me. Although I get by just fine when it comes to hitting spend requirements for credit cards it’s always nice to have multiple avenues to manufacture spending and help you reach your goals faster. This would also mean that I could do more cards in shorter amounts of time since right now my limiting factor is hitting the spend requirements.
Normally, brokers like TD-Ameritrade force you to load money into your trading account using a bank account but not Loyal3. They let you fund up to $2,500 per stock using a credit card and there appears to be no monthly limit(other than the 53 stocks x $2,500). I’ve actually seen reports of people loading 25-35k/month using a credit card and then immediately selling the stocks in order to get the rewards points. Let’s take a look at that strategy.
Free Rewards Points
If I could buy $1,000 worth of Amazon stock using a credit card and immediately sell the stock and cash out the money to my bank account this would be a no brainer. But since the trades with Loyal3 are not in real time, you could very easily lose a lot of money inbetween the purchase and sale. Right now, Loyal3 does not work well for people trying to day trade but if you were going to invest in these companies anyways, why not get a guaranteed tax free return of 1-2%? If you currently own any of these individual stocks and/or plan on investing more in them, I would use Loyal3.
If you use a rewards card like the Barclay Arrival Card, you’re guaranteeing yourself a 2.2% return right off the bat. Like I said, I don’t invest in individual stocks but investing in a few megacorps like Coke, Walmart, Amazon,
Enron, etc isn’t the worst strategy in the world. There are much dumber things you could invest your money in.
Right now there is discussion going on in the forums of a few sites that I follow about how credit card churners like me can take advantage of Loyal3. Basically we want to buy stocks with our credit cards for the rewards points and then sell them without really ever investing in the companies. Unfortunately, I’m not seeing a good way to do it. It’s just too risky in my opinion.
Here are some threads on the subject if you’d like to do further research:
Let’s say you buy $1,000 worth of Amazon stock and you get 2.2% cash back(using Barclay Arrival) on that amount. You’ve made $44 but you now have $1,000 at risk and reports online say that it can take anywhere between 1-3 days to execute a sale. Do you think a stock like Amazon can fluctuate 2.2% in 3 days? Hell yea it can. It could move more than that in 3 minutes! So therein lies the problem with this strategy, I don’t think it’s worth the risk.
Diversify the Risk Away
Since Loyal3 currently overs offer 50 stocks you could also try and diversify the risk away by spreading that $1,000 across multiple stocks. 50 stocks isn’t a huge number but when you’re dealing with giant companies like the ones that Loyal3 offers I think this is a safer bet. But still, now you’re relying on the average return of the market and the market could easily swing 2.2% in 1 day.
Since the stock market tends to move upward over time, the law of large numbers says that eventually this strategy would work as you did it more and more. But in order to be safe, it would probably require 10 years + so that you could absorb the volatility of the market. Who knows if Loyal3 will even be around that long?
The Only Way to Justify It for Me
There’s only one situation in which I think it might make sense for someone to invest their money using this strategy. Let’s say you normally stay away from credit cards but you see an offer like the Barclay Arrival Card that pays you 40,000 points($400) for spending $3,000 in 90 days. If you go ahead and buy $3,000 worth of shares from Loyal3, you’d get 6,000 points(for spending $3,000) plus 40,000 points for meeting the spend requirements. Once you redeem those points you’d get a 10% bonus bringing your total to 50,400 points or $504.
That means that you can withstand a $504 loss in your trading account and still come out ahead. 504/3,000 = 17%. I think it’s a very good bet that a single stock will not go down more than 17% in 1-3 days. But if you’re worried, you could diversify among 5-10 stocks and then there’s probably a 99% chance you would come out on top.
But the only caveat to this strategy is that if you have other means of spending the money that have less risk you could employ those methods and never put your $500 at risk. That’s the case for me since I spend around $1,000 a month plus I use Amazon Payments, Vanilla Reloads and Bluebird to meet spending requirements. So unfortunately this strategy won’t really work for me.
Loyal3 has a unique business platform and I think they’re going to grow and flourish since there will always be people who think they can beat the market or don’t understand uncompensated risk. It’s ironic that Loyal3 really only makes sense for people who invest in individual stocks but that strategy itself is flawed. Hat tip to reader Paul though for alerting me to Loyal3 since I hadn’t heard about it until he mentioned it in the comments section of one of my articles.
But like I mentioned earlier, investing in strong large corporations really isn’t that bad of a strategy. Things like expense ratios and fees(which Loyal3) eliminates will probably have a bigger impact than anything else over the long run. And it’s pretty cool to see a company come out in favor of the consumer instead of Wall St. Wall St. has had access to these types of trades for years and now consumers are finally getting in on the action.
Readers, what do you think about buying stocks with Loyal3? One of the reasons why I was so eager to write this article is because I would love to open up the comments section to other credit card churners like me so we can figure out a way to riskless-ly take advantage of this opportunity while it lasts. Please comment below as to what you think of my spend strategies and conclusion. Right now, I haven’t figured out a good way to do it.
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-Harry @ PF Pro