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.
Risky Strategy
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.
Conclusion
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.
Track All Your Accounts With Personal Capital

-Harry @ PF Pro
Another potential downside: Do you have to worry about short-term capital gains tax? Seems like it could be an added hassle around tax time if you’re doing a lot of trades.
Yea you would have to worry about short term capital gains but only if you’re making money. I don’t mind paying taxes if it means I made money haha.
But I think most people are still trying to figure out a way to safely load up their credit cards without really investing in a bunch of volatile individual stocks.
Harry,
Thanks for the thoroughly thought out post on Loyal3 and thanks for the plug to my website.
The only stocks I’m buying on Loyal3 are those nice big companies that pay great dividends and have historically produced them. I am a “buy and hold” kind of guy.
Since I purchase on a monthly basis, the lag time between funding and execution doesn’t bother me that much as it works out as dollar cost averaging.
I’m only buying stocks there that I would have bought through my regular broker (and paid a trade fee for the privilege).
The miles on my credit card are just a tasty, little bonus.
Thanks for all you do!
Paul
No problem Paul. Yea Loyal3 is perfect for someone in your situation. Like you mention, not only is it free but you also get credit card reward points!
It’s definitely something I’m going to keep my eye on though in the future since if you were to include it in an after tax portfolio you could do some type of tax loss harvesting and double, triple, etc dip on your CC reward points.
I agree with Paul, this is great for folks who were planning on buying and holding stocks anyway. But you are right, it’s not really worth the credit card rewards.
Yea I haven’t quite given up since there might be a way to buy/sell a little quicker(hours instead of days) and in that case it might make sense.
Loyal3 does not allow $2500 per stock purchase to be funded by credit card. They only allow credit card funding for their automatic monthly purchase program in the amount of $10, $25, or $50 per month. One-time purchases or larger automatic monthly purchases have to be funded via ACH (checking account). This is clearly stated in their T&C based on the link to their website. Do you have direct information from people that were able to fund with credit card for $2500? The only conceivable way to do this is to set-up an automatic purchase of 50 different stocks each month at the maximum of $50 each (50 x 50 = $2500).
Hi Tom, that is what Loyal3’s website but pretty much everyone on the threads I referenced above have reported that they’ve been able to buy up to $2,500 per stock.
So you’re right that is what’s stated in the T&C on their website but for whatever reason it isn’t enforced 🙂 Happy MS’ing.
They have enforced it now.
Yep, I updated the article a few weeks ago. The strategy still works, just takes some more time and can’t do as large of amounts.
I’m working on an article that will detail exactly what I’m doing/how I’m buying now that they’ve changed the limits. Still a lot easier than most of the other MS methods IMO.
They’ve strictly enforced it for the last several months that I’ve traded with them. I’ve written them to suggest they raise the $50 limit, but for some reason, they don’t seem interested in doing so. I guess the fees they have to pay are just too high to justify it. (As a merchant who takes cc, I absolutely understand that.)
Other than the limit, I am a big fan of L3 and it plays a steady, if minor, role in my MS. I am one, though, who was buying and holding those stocks anyway. I’m not interested in churning them, and if I were, I certainly wouldn’t do it with Loyal 3 and a 4-5 day lag time! Timing the market is what real brokerages and limit orders are for (if only they took credit cards . . . . ; )
Yea I mean they’re losing close to 3% on every transaction which in the investment world is HUGE. I bet they’ll start charging soon, don’t think it’s a sustainable business model.
I’m with you and although I did a lot of money this go around, L3 is probably best for those quick spends when you need 1-3k and don’t wanna deal with other more labor/time intensive methods.
The key to making this work is to short the same shares in a standard brokerage account that you just purchased through Loyal 3. If executed well, you have eliminated – or virtually eliminated – the market risk and are just churning for points.
Hmm I like where your head’s at but I’m not sure that would work since you don’t know when Loyal3 is going to buy the shares. There’s also the transaction fees involved with buying/selling in a regular brokerage account that would probably eat up a lot of your returns.
I think the whole key to any credit card use, especially when you are trying to reap the benefits of points and other rewards is the ability to pay off the balance as soon as you make the purchase, or at least before the billing cycle. The amount of interest you would have to pay in just a couple of months will outweigh almost any benefit you could receive.
That said, this idea with Loyal3 sounds really intriguing. I buy and sell stocks all the time and if I could work out a bonus by doing it with my credit card, all the better.
Adam, that’s a given. If you don’t have the spare cash to float what you MS with sites like Loyal3 you should not be doing this.
Even though Loyal3 changed their cc funding limit to $50 per stock, they still have 40-50 stocks so I’m currently MS’ing about $4k between my loyal3 and my fiancee’s loyal3 account.
Hi Harry, I just wanted to get back and let you know, I made my first purchase and then sold, cashed out and paid it on the card again. It worked really well. I really like the idea of just buying stocks each month too.
Thanks again for the article.
Hey Adam, that’s awesome! I just finished a huge MS spree so I’m not using it anymore but it’s definitely good for that once in a while MS need.
Make sure you follow the guidelines I set forth in my new article though to stay under Loyal3’s radar. I haven’t checked in a month or so but they were definitely shutting down accounts for buying/selling too quickly and in large quantities.
https://yourpfpro.com/racking-miles-points-loyal3/
I just wrote an updated article on my experience with using Loyal3 to do about $8,000 in spending:
https://yourpfpro.com/racking-miles-points-loyal3/