HERE'S an idea. With the stock market red-hot, why not use big leverage to make big profits?
Let's say you want to buy one lot (1,000 shares) in Singapore's largest company, SingTel. It trades for around $3.50 per share, which means 1,000 shares will cost you $3,500.
The only trouble is you don't have an extra $3,500 lying around.
On the Singapore Exchange (SGX), you can borrow up to 70 per cent of the value of the shares, which comes to $2,450, which means you still have to cough up $1,050 cash upfront.
With your credit card, there is no 70 per cent limit. You can borrow the full amount for the shares ($3,500).
Actually, this isn't my idea. The offer comes from UOB and is part of its zero per cent interest loan promotion.
The ad says: 'Got your eye on a stock but don't have the funds to invest? Get an interest-free loan with your UOB credit card.'
PROBLEM IF PRICES FALL
Should you buy stocks with borrowed money?
The problem comes if prices fall. Then you have to repay all that you borrowed plus interest. It is like gambling with money you don't have.
The UOB deal advertises zero per cent interest. But a footnote says there is an upfront processing fee of 5per cent for a 12-month loan.
The loan is linked to a UOB credit card, which it automatically bills in 12 equal instalments. For a $3,500 loan, you would need to pay the $175 processing fee plus loan repayment of $291 per month.
Like any credit card, there is no interest charge if you pay on time.
If you pay late, however, it gets expensive. UOB charges 2 per cent per month (24 per cent per year) plus a $45 late fee.
It means shares must rise more than 24 per cent a year for you to break even.
It isn't just UOB doing it. DBS' ads also invite you to borrow money to buy shares.
Last week it advertised: 'Be it to invest in your favourite stock or to seize that investment opportunity, Cashline Platinum lets you achieve all these at a low interest rate of 6 per cent per annum or 0.5 per cent per month.'
Six per cent interest, yes, but only if you make more than $150,000 a year.
If you earn between $30,000 and $150,000, the interest charge is 17.8 per cent.
