All You Need to Know About Buying Stocks with a Credit Card

ByG. Dautovic
April 11, 2022

In the third quarter of 2021, the global stock market almost reached a staggering value of $41.8 trillion. If you're looking to jump on board and invest in stocks, you may be wondering: can you buy stocks with a credit card? After all, not everyone has much money saved up.

It is possible to get stocks with a credit card, although it's not always the easiest thing to do. In this article, we'll take a look at the pros and cons of buying stocks with a credit card and answer the most important question of them all - should you do it?

Things to Know When Buying Stocks

Many people don't realize that using a credit card loan or cash advance to buy stocks is a very valid strategy. Not just that -  it can be a great way to finance your investment portfolio if done correctly.

That said, there are a few things you should know about before you get into it, starting with the fees you’ll be paying.

Fees

For starters, brokerages that allow you to purchase stocks will undoubtedly charge you an investment fee. These are often not as prominently marked as they should be, so make sure to read the fine print when selecting your stockbroker and before you make a purchase.

Additionally, most credit cards will charge you a cash advance fee on any money you borrow when you use a credit card to buy stocks. This fee is typically around 3%, with the highest amount being 5%.

Therefore, it’s important to factor this credit card fee into your calculations when determining whether or not using a credit card to finance your investments is the right move to make.

You don't want to get into debt just to purchase some stocks, so make sure you are comfortable with the fees associated with using a credit card.

Better still, find zero-interest options and have a plan to pay off your investment as quickly as possible. You'll also want to pay off your credit card balance in full each month to avoid interest charges.

How Does Purchasing Stocks with a Credit Card Affect Your Taxes?

There are a few tax-related considerations if you plan to buy stocks with a credit card. For one, you'll need to make sure that you're accurately reporting the purchase price of the stocks. If you don't, you could face penalties or an audit from the IRS. 

Additionally, any gains or losses from the sale of the stocks will be subject to capital gains taxes. So, keep that in mind if you're looking to minimize your tax bill. 

Finally, if you're using business credit cards for stock purchases, you may be able to deduct the interest expenses from your taxes.

You can always rely on tax software to handle this, but it's best to consult with a tax professional before making any major decisions.

How Does Buying Stocks Affect Your Credit Score?

Whenever you're investing, it's essential to consider the financial ramifications and impact on your credit score. 

First, credit card companies may treat the transaction as a cash advance, which can accrue interest at a higher rate than purchases. Buying stocks may count towards your credit limit, negatively impacting your credit utilization ratio.

Finally, try to avoid creating debt on your credit card, as you’ll likely be charged interest on the outstanding balance. The credit reporting bureaus take all of this into account when calculating your credit score.

Ultimately, whether or not buying stocks with a credit card affects your credit score will depend on several individual factors, so it's best to speak with your credit card company to understand better how the purchase will be reported.

Advantages of Using a Credit Card To Buy Stocks

Credit cards are a popular tool for investing in stocks, and there are several reasons for that.

Firstly, if you use a credit card with a low interest rate, you can essentially finance your investment at no cost. 

Furthermore, if you use a credit card that offers rewards, such as cashback offers or points, you can earn rewards on your investment. Finally, buying stocks with cash from your credit card can help you build your credit history and improve your credit score. 

Where To Purchase Stocks With a Credit Card?

There are a few different places to buy stocks with your credit card. If you go through a brokerage firm, you’ll likely be charged a commission on each trade.

However, some online brokerage platforms will allow you to buy and sell stocks without paying a commission. It’s essential to do your research and compare the costs of different platforms before making a decision.

When buying stocks with funds from a credit card loan or credit card cash advance, you need to look for a platform that accepts credit cards. Luckily, these shouldn’t be too hard to find.

At a typical online brokerage, you can use a credit card but also pay with a debit card, personal check, or wire transfer.

However, some platforms only accept a limited number of payment methods or charge you unreasonable fees for purchases. You need to check out the payment options available on each platform before deciding which one to go with.

What Are The Risks Associated With Purchasing Stocks With a Credit Card?

Many people think that using a credit card to purchase stocks is an almost foolproof way of getting started on the stock market. However, there are several risks involved with this strategy.

First of all, if the stock market crashes, you could end up owing a lot of money to your credit card company. 

Additionally, if you don't pay off your credit card bill in full each month, you'll be charged interest on your purchase(s). This can quickly eat into any profits you make from your stocks. Finally, if you max out your credit card to purchase stocks, you'll have less available credit for other purposes.

Therefore, it's crucial to weigh the risks and benefits before using a credit card to purchase stocks.

Final Words

So, should you buy stocks using a credit card? The answer is yes - provided you take the necessary precautions. Be sure to do your research and understand the risks involved before making any investment decisions.

And if you're not comfortable using a credit card for this purpose, consider opening a brokerage account that allows investing in stocks without using plastic.

FAQ

Can you use a credit card to invest in stocks?

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Yes, you can buy stocks with a credit card. There are a few advantages to using a credit card, including the ability to earn rewards and build a credit history. However, there are also some risks to consider, such as the potential for high interest rates and credit card debt if the stock market crashes.

What is purchasing stock on credit called?

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Purchasing stock on credit is typically referred to as a "margin purchase." When you make a margin purchase, you're borrowing money from your broker to buy stocks. This can be a risky move, so it's important to understand what you’re getting yourself into before proceeding.

Where can I buy stocks with a credit card?

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Where can you buy stocks with a credit card? Lots of places, actually. Brokerage firms typically charge a commission on each trade, while some online platforms allow you to buy and sell stocks without paying a commission. Whatever you decide, make sure to read the fine print and be aware of all possible fees before buying stocks anywhere.

About author

I have always thought of myself as a writer, but I began my career as a data operator with a large fintech firm. This position proved invaluable for learning how banks and other financial institutions operate. Daily correspondence with banking experts gave me insight into the systems and policies that power the economy. When I got the chance to translate my experience into words, I gladly joined the smart, enthusiastic Fortunly team.

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