Plenty and cheap money avail­able

Finweek English Edition - - Creating Wealth -

LAST WEEK, I bought some shares on credit. A few BAT shares and – per­haps too many – Stan­dard Bank shares. I know you’re never sup­posed to buy shares with bor­rowed money; it’s al­ways been one of the strictest rules. But it’s all In­vestec’s fault.

Let me ex­plain: In­vestec is at present lend­ing money to any­one – it doesn’t mat­ter how rot­ten your credit record is – at the ex­tremely at­trac­tive in­ter­est rate of less than 11%/year for buy­ing shares on credit. In fact, they don’t even want to know your name, and you don’t re­ally have to re­pay the loan.

Sounds im­pos­si­ble, in­cred­i­ble, es­pe­cially now that credit is so hard to get? In­vestec, by the way, is not the only bank that’s pre­pared to do this. Ned­bank and Stan­dard Bank are com­pet­ing in this mar­ket with more or less the same prod­uct. Absa too. FNB so far seems a bit re­luc­tant to en­ter the fray.

So, I couldn’t re­sist the temp­ta­tion last week of again buy­ing a few in­stal­ment shares.

In­stal­ment shares work like this: Let’s as­sume the cur­rent price of Stan­dard Bank’s or­di­nary shares is R84. In­vestors can bor­row 50% of this, that would be R42, at any of the above-men­tioned banks and it only needs to be re­paid in 12 months’ time. This is called the first (only) in­stal­ment. That’s why they’re called in­stal­ment shares. The de­posit paid by the in­vestor is R42 plus in­ter­est at 11% on the re­main­ing R42 for 12 months. That’s an­other R4,62. Add that to the R42. Then you pay In­vestec R46,62, and you will have bought one Stan­dard Bank share on credit. The fi­nal in­stal­ment of R42 is due in a year’s time.

But, the banks de­cided about three years ago, that this was still not good enough. Let’s give the in­vestor credit for 75% of the pur­chase price, they said. So now you can buy Stan­dard Bank with a de­posit of only 25%, or R21, and an in­stal­ment of R63 due in a year’s time. In­ter­est of R6,93 on the out­stand­ing in­stal­ment must be paid with the R21 de­posit. To­tal price: R27,93. And you will be able to boast to every­one about how you own Stan­dard Bank shares – just like the young guy who goes around show­ing off the shiny new car he’s just bought on HP, with never a thought about the re­pay­ments.

Of course, In­vestec and the other banks don’t plan to sell shares on tick to just any­one, so they used the JSE, cre­ated the so-called in­stal­ment shares and listed them there. The prospec­tive in­vestor pays his de­posit to the bro­ker he uses to buy the shares. On the due date, he also pays the in­stal­ment to the bro­ker, who then pays ev­ery­thing over to In­vestec. And, hey presto! The share that you bought so eas­ily on credit is yours.

Last week, I bought BAT – or­di­nary shares are now trad­ing at R224 – on credit by buy­ing In­vestec’s listed in­stal­ment shares, which are now avail­able on the JSE at R76. I still owe an in­stal­ment of R161,18 on the shares. The in­stal­ment is due in the first week of next

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