Investing with Loyal3

EDIT 2018: Loyal3 shut down operations and merged with another brokerage and unfortunately stopped offering the services listed below.  THis is unfortunate as I thought the combination of monthly schedule investments and partial shares was a godsent for simple investing. Alas.

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As I'm getting smarter about investing (with a focus on long term), I keep circling back to how much I like Loyal3. Its dirt simple, allows for automated investing, and fee free.

For those who are looking to start putting away money, and are thinking about getting in "the market" (whatever that means to most people), there is usually a barrier.  For most investing is confusing. They don't know what to buy, what to sell, the fee structure can seem confusing ("what's an option?"), and of course there's the money. If you're like me, the concept of "invest over $100,000" is so foreign, they might as well be asking for a million.

With a regular stock brokerage you pay a commission when you buy or sell stocks.  For most online brokerages, this is a flat fee (ranging from $4 to $12).  Doesn't seem like much, but it can really eat into your investments.  As an example, if you want to buy just $300 of a stock, that $12 commission is a 4% hit.  You're stock will need to go up 4% just to break even.  Then when you sell you'll owe another $12.  So you started out with $300 in your pocket, bought $288 worth of stock, it rose 8.3% (good return it would seem), you sold and wound up with $300.  Well damn. You picked the right horse, put your money on it, and still made no money.

If you're going to buy and hold this may not matter as much, except that most buy and hold investments are looking at a 4-6% return every year.  So that $300 example, you lost a year's worth of growth just to get in the game.

If you have a few thousand dollars, this matters much less. a $12 fee on $1,000 is much easier to make up, and on $5,000 its in the noise of daily movement. But I don't usually have that kind of money lying around.  Further I don't want to wait until I have it to make some returns.

Loyal3 lets you buy stocks without paying a fee.  Further you can buy as little as $10 worth of stock and charge it to a credit card.  They let you automate this so you're card gets hit every month for that $10 and just buys stock for you.  They do this by bunching up all the orders and making one buy every day and then dividing up the stock shares to the users.  The fees they do pay are covered by the companies who are interested in bringing in more investors (the theory is that if you own Walmart stock, your more likely to shop at Walmart.  I can't argue this logic)

So lets break this down into Pros  and Cons

Pros:

• You can buy fractions of shares. You don't need to have the full purchase price of a stock, which in some cases can be hundreds of dollars
• There is no fee to buy or sell, so gains on your stock are yours from day one.
• You can put small amounts (up to $50) on your credit card.  If you have a cash back card that means you make money (or points, airline miles, etc) on the purchase. (See edit)
• You can automate this for every month.  Automation is one of the keys to building wealth because you stick to a plan, set aside cash, and it grow without your involvement.
• They allow you to buy stock in many companies you've heard of, who have been around for a long time, who pay dividends, and who will conceivably be around for a while. Think about Coca-Cola, Mcdonald's, Walmart, Kraft, Target; companies you know of and use on a daily or weekly basis.

Cons:

• Loyal3 is not a full service brokerage, and you can only invest in companies they have made deals with to cover their expenses.
• They only make one transaction per stock, per day. Usually around 2 PM. So you may not always buy at the best price of the day, nor sell at the highest.  For most long term investors this doesn't matter, but you CAN NOT day trade here. That's not the point of the program.
• Loyal3 takes some time to transfer money to.  They only buy when they have the money in hand.  So it you want to make a purchase using your checking account, it will take 3+ days.
• If you use a credit card you are not paying off each month, you're a fool.  You are borrowing money at very high rates in the hopes of modest returns.  Don't do that! I use a credit card that I pay off every month like clockwork. I get my cash back and pay it off.

I've been using this for about two months.  My transactions were smooth (if a bit slow, certainly compared to Tradeking), but I've bought my stocks on down days. and have since made a few bucks.  I have not sold anything yet, but will update when I do.

So in short, if you are new to investing, have only a little extra cash, and want to buy some stocks for medium and long term growth, I think Loyal3 is an excellent option.


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10 November Edit: I received this email from Loyal3:

"Through the success, we've also learned a lot about how people use LOYAL3. Credit cards have become a common method for people "gaming" LOYAL3 to gain credit card points and not for the purpose of investing. This increases our costs and subtracts from our mission of making it easy, affordable and fee-free for people to invest in the brands they love.

In order to put an end to the "gaming" of LOYAL3, and to maintain fee-free investing, on Tuesday, 11/18/2014, we will be removing credit and debit cards from the LOYAL3 platform. Automatic Monthly Plans (monthly recurring investments) using credit and debit cards will continue to be active until Thursday, 12/11/2014, to allow time to switch over to ACH (checking account transfers).               

So it seems the Credit card thing was to god to be true.  Sadly some bad apples have used it to game the system and therefore ruined what I thought was an excellent option for new investors.  I still think this is a valuable company to trade through, and I value the free trading more than the credit card use.


(Disclosure: While I have an account at Loyal3, I have not been paid for this review, nor do they have an affiliate program, so I gain nothing from this review.  I just wanted to share.)