Plenty and cheap money available
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