Don't have the cash to invest online? Why not test the limit on your credit card?
While investing via credit cards is, for the most part, unheard of, one company, Technology Funding, is experimenting with the idea. The firm announced today that it had received approval from the Securities and Exchange Commission to accept credit cards for the online purchase of shares in its latest public fund.
The fund, called Technology Funding Venture Capital Fund VI (VC-6), is a venture fund that opened for investments in January 1998. The fund plans to raise $100 million through an online public offering.
The VC firm said that this is the first time investors have been able to use a credit card to invest in a newly issued security. Most competing brokers, however, do not seem interested in the concept.
Discount broker Charles Schwab, for example, does not allow investors to purchase securities using credit, and does not have any plans to do so, said Dan Hubbard, a company spokesman.
In the grand scheme of investing, you want to make a greater return than you have to pay out, "but when you have to pay off a balance every month, [the interest expense] negates the gains that you may make," he said, noting that many credit cards typically carry interest rates near 19 percent.
Which means that an investor would have to make a 19 percent annual return on an investment just to break even.
"Most firms offer margin accounts which cover the same situation as a credit card," said Hubbard. "A standard margin account is borrowing money to buy securities and then paying for them later, and the amount that investors would pay is significantly lower than many credit card companies charge."
At Schwab, the interest rate on margins loans under 10,000 is 9.25 percent; 8.75 percent on loans between $10,000 and $25,000; 8.25 percent on loans between $25,000 and $50,000; and 7.75 percent on loans above $50,000.
The Motley Fool, an online financial forum for individual investors, offers 13 rules for investing, and advises first and foremost that wiping out credit card debt is crucial to a long and prosperous investing career.
Rule No. 2 says one of the keys to investing is to only use money that is free of obligation. "Thus, if you are carrying a revolving balance on your credit cards, it ain't free (Neither are you, unfortunately)," the site proclaims.
"Paying off credit cards is not the right plan to take through life," the site warns. "You'll never make your savings grow."
But Charles R. Kokesh, founder and president of Technology Funding, argues that using credit cards to buy securities is the next logical step in online investing.
"We are pioneering the use of credit cards for online investments as a convenience for our investors," Kokesh said in a statement. "As consumers become more comfortable with electronic commerce and online investing, using credit cards as a payment mechanism is a natural and necessary progression."
Technology Funding could not be reached for additional comment.
The firm's VC-6 fund requires a $1,000 minimum investment, which is equal to 10 shares in the fund, according to the prospectus. Technology Funding said that VC-6 shares also may be purchased by mailing in a check.
Potential investors must have a net worth of at least $45,000 and an annual gross income of at least $45,000, according to the company's Web site. Unemployed individuals must have a net worth of at least $150,000.
The site recommends that an investment in VC-6 should not exceed 10 percent of the individual's net worth, and notes that venture investing is a "long-term, illiquid investment and therefore is not appropriate for individuals who may need access to their money over the life of the fund."