Using a Credit Card to Buy Fee Free Stocks, Earn Points, and Generate Spending Towards Bonuses

I’ve seen plenty of discussion of the idea but haven’t covered the ability to buy stocks with a credit card (and earn miles, as well as generate spend towards signup and threshold bonuses) without a transaction fee.

That’s because the particular company offering it, Loyal3, doesn’t execute orders real-time, so you aren’t buying in at an ex ante known price. So there’s some price risk. Plus it’s not really a costless way to earn miles since there’s both upside and downside in the pricing of the investments you’re buying.

I tend not to invest in individual stocks. There are very smart people who do that full-time and they get killed on it half the time. As a casual observer, even in industries where I have great familiarity, I consider myself at a disadvantage.

Instead, I buy broad-based stock mutual funds and exchange traded funds with low expense ratios.

Nonetheless, there are many people who are going big buying stocks with credit cards, and there’s now a mainstream article written about it, which the author sent along to me.

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.

There are a shade over 50 stocks available at Loyal3, you can’t just buy anything you wish. But most are large cap stocks, some with relatively little volatility.

Certainly this works best for people who would otherwise be buying these stocks anyway, might as well do so by credit card (and you’re betting the value of the rewards outweigh pricing risk that stems from the site’s batch processing of orders).

But there are those who will buy and then turn around and sell the same shares.


About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. I haven’t yet read the article, but knowing a lot about investing, this seems like a really bad idea to me. Heck, there was just a 60 Minutes story last night about the “skimming” that goes on with high frequency trading. If this company doesn’t allow you to set a limit price, it seems extremely likely to me that you’ll be overpaying for the stock — and thereby losing whatever bonus you could make by paying for it via credit card.

    In general, I’d also share your opinion about the wisdom of most people investing in individual stocks. If you’re an expert — the way Gary is an expert on points and miles — you should certainly consider it, even though it’s still going to be a risky endeavor (albeit one in which the odds might be in your favor). For most people, it’s borderline crazy these days, as your odds of outperforming the market are low and frankly based only on random chance. Think about it as a world more complicated than the frequent flyer game, but one in which lots of people are trying to rig the market to take money from you.

  2. I think the best advice you can give to the risk-adverse for using a Loyal3 is to wait until they offer another IPO. They have been doing generally alright this year with a nice pop on day one and shortly after. There’s obviously still risk, but I think less so in the current market when it comes to IPOs.

  3. @Chase- For this method to work you want to minimize as much volatility as possible so the price doesn’t change much.

    IPOs are incredibly volatile. Yes often to the upside, but also to the downside. Witness King Digital.

  4. @iahphx

    It is hardly a feat to figure out how little you know about investing if you say that you know “a lot about investing.”

  5. I used the link in the referenced article to look at the Terms & Conditions on the Loyal3 website. The T&C explicitly state that the option of funding by credit card is only for the automatic monthly share purchase of $10, 25, or 50. The terms go on to state that one-time purchase or automatic purchases in amounts other than $10, 25, or 50 can only be paid for by ACH transfer from a checking account. Based on the T&C it isn’t possible to fund $2500 stock purchases via credit card as mentioned in the article. Anything over $50 has to be through ACH. Is there something that I’m missing here?

  6. I know very little about investing and basically do what Gary does, most of my investments are in mutual funds etc. However, the end of day trade isn’t necessarily a risk, it just doesn’t lend itself to short term investing with a small amount. If you held the stock for an extended period you would minimize the minor risk associated with the delay in trading?

  7. Nick —

    One could certainly argue that if you planned to hold the stock for an extended period of time, slightly overpaying at the time of purchase isn’t going to be very material to your investment. And you could also argue that if you really want to buy individual stocks but are not going to be savvy enough to seek out a better execution price, it doesn’t matter if you “overpay” these guys or somebody else (so perhaps getting the credit card bonus points would be better than nothing). All that said, I don’t think anyone who is an investment professional would actually recommend this program to maximize an investor’s wealth.

  8. You know what’s actually interesting addition is….if you were to actually pull off purchasing $2500 worth of stock and you did a market buy and market sell, you can actually write off that “loss” as capital loss against your other capital gains…

    Thereby, the credit card “transaction fee” can be a tax write off..

    Anyone care to chime in on this?

  9. @Gary No worries, of course. I linked to it now only because the PF Pro writer hadn’t done it yet, so I wanted to share my experience as someone that has. I’m a couple hundred grand in, and so far, so good. In a good market, with blue chip stocks, you may lose a bit, but not much.

  10. @John K,

    You would only get to write off any paper losses to your stocks. Say you bought $50 of AAPL and then sold it at a 10% loss for $45. You could use that $5 to offset capital gains (once capital gains are exhausted you can reduce up to $3k in ordinary income). Depending on your income level this could be a savings of $0 (0% long-term capital gains tax for lower income people) or around $2 for short-term capital gains for wealthy people in ~35% tax bracket.

    The major risk to this deal is based on market timing. Loyal3 or someone is making money by buying up shares during the day at a cheaper price then selling them to Loyal3 customers at a higher price later that day.

  11. Sounds like a great way to buy stock. Maybe I’ll load up on CVS stock. Oh, wait a minute, I hear they may have a sales slump!

  12. Thanks for linking to my article.

    I’m pretty impressed with the comments here, not bad for a points and miles crew 🙂 Generally investing in individual stocks is not a good idea, reward does not justify the risk. That being said, A LOT of people still do it and it’s not the worst strategy in the world. The companies Loyal3 offers are big blue chippers, occasionally you’ll have an Enron type situation but that’s very rare.

    IF you’re going to buy and hold these stocks, might as well do it with Loyal3. I’m almost tempted to replace my large cap index fund with 30-50 of these stocks. I think the 2.2% premium(if you use a card like Barclay Arrival) might even outweigh the diversification risk that you’re taking on by investing in 50 companies instead of 5,000 like with an index fund. Plus that 2.2% return is tax free, not so with cap gains/dividends.

    So it might not be a viable continual MS strategy like AP but if you have 10k to invest, might as well churn that AA exec card like I’m about to do and buy 10k worth of stocks, eh?

  13. A very interesting idea, I wonder though if those who try to buy then sell the same shares shortly there after with this run into issues with FINRA day trading regulation which requires a 25,000 account balance.

  14. Horrible idea. Based on the comments, you are doing your readers a big disservice by even putting this idea in their heads.

    No mention of account shutdowns going on already makes me believe you did not even research this a little bit.

    Disappointed.

  15. I would strongly advise against it. I have been using loyal3 and their pricing is not good. You will end up buying on intraday highs and selling on intraday lows.

    I usually read this blog religiously but hardly comment. I am compelled to put it out there. I am slowly building a portfolio with small amounts but just usual index funds via vangaurd is much better idea.

  16. @Edwin, the only people getting their accounts shut down are those doing 10-30k/month of buying and immediately selling. Doesn’t take a genius to figure out you’ll get your account shut down for that. And who cares if you do get your account closed with Loyal3?

    @pranav, I don’t think their pricing is off by much. I put in 5 buy orders a few days ago and the price I paid was about what they were trading for +- 10 cents. Vanguard index funds are a better idea than Loyal3, you’re right. But this is more of an MS opportunity than anything.

  17. I had been buying stocks at loyal3 since the past 2 weeks and all of a sudden I was surprised to see that now Loyal3 doesn’t allow you to purchase anything more than $50 at one stroke. This wasn’t the case until yesterday.

    So they have these preset amounts of $10, $25 and $50 which you can buy at one time. So assuming a stock like google costs in the range of $500 then you have to make 10 separate purchases of $50 in order to buy one share/stock of google.

    So this option to manufacture credit card spending has gone for a toss….
    Anyone who can suggest alternate ways to buy stocks using credit cards?

    Mike

  18. While I certainly love manufactured spending this seems like one of the riskiest possible ways to generate points. While this can be scaled up, investing in the stock market like this is incredibly risky and a lot of people could lose a lot of money and completely negate the benefit from the points. To me there are just so many other better ways to generate manufactured spend. Unless you would invest in the stock anyway and are a savvy investor you should not try this one!

  19. wow–a lot of pious and wrong “experts” mixed in with the common sense, here. A few clarifications:
    1. I’ve been trading (for minor MS) on Loyal3 for several months, and it’s been limited to a max of $50/stock/month for credit cards since I started.
    2. The risks are pretty minimal. As noted, these are largely the same blue chips I’m carrying a lot of anyway.
    3. The prices are pretty good. I see no evidence at all that they are trying to market time and steal the cream (which would also be illegal, given what they say they are doing).
    4. My only complaint is the very low cc limit, which makes this a very minor way to MS.
    5. No one should trade individual stocks (regardless of their stability) as their primary investment. I use no more than 5-10% of my portfolio at any given time for individual stocks. But, it’s fun, and can be pretty lucrative. (My Google stock is up over 130% in just a few years, which none of my mutual funds have done!)

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