What if debit cards could pay for purchases by selling securities?
jpkoning.blogspot.com
jpkoning.blogspot.com
* Credit cards exist. If you're wealthy enough to have taxable investments, your credit is probably good enough for credit card rewards.
* From a behavioral finance standpoint, mixing long-term investments and short-term spending is probably not a good idea.
Replicating this would involve having little to no cash, spending on a card, and then liquidating investments to pay off the debt. Which is similar to how most wealthy persons manage their consumption.
Of course, this requires having access to credit, assets, and money transfer services. Broadening access to that isn't necessarily a bad idea.
But poor people don't need those kinds of micro optimizations that will save them pennies a week (do you need an extra 1% interest in the $14 in your checking account?). There is way, way more low hanging fruit than that.
That's not really true. Wealthy people know not to lose their principal. They do this by borrowing either unsecured or on margin against their assets, the using dividends and interest to pay off their spending leaving the assets themselves untouched. Doing this in a way that leads to increased net worth requires a cushion.
With the new world of zero commissions and fractional shares available (soon?), the minimum wealth required to buy stocks isn't very much. I still don't think this makes very much sense, though. If you can get credit, buying now and settling in a month would mean you have time to manage a more strategic sale. If you don't have access to credit, presumably because of lack of wealth, volatility is going to kill you --- you'd be much better served with a (low) interest checking account.
If you're going to pay it anyway it won't matter but it would really stink to pay $1,000 worth of stock on a shopping spree, plus $150 capital gains tax and then that stock drop 25% in value the following month.
Edit: unless perhaps you're assuming that the $1000 you spent is considered to have come entirely from realized gains on what is actually a much larger position? If so then I can see your point.
"Why do people prefer to pay for things using stable instruments rather than volatile ones like Tesla shares? My guess is that it has something to do with FOMO."
Or maybe it's a terrible idea to have people paying for their groceries and rent with assets that have the possibility of tanking 50% in a matter of weeks. If this feature would have existed in 2008 there would surely be regulation in place to prevent it today.
This, so obvious. Most people actually want to keep some fraction of their wealth in safe, liquid assets, it's just the sensible thing to do. So it's not clear to me what they would gain by getting rid of their ordinary checking accounts. Cash is king anyway.
Or, bear with me, what if there was a credit line secured by the stocks in the account? Then you wouldn't have to sell anything! But to market it, you'd have to give it a catchy name. Something...edgy, but unfortunately, there's already something called "Merrill Edge" so, I dunno.
Ehhhh be careful. Margin interest in the US is tax deductible only to the extent that you used the margin loan to buy investment assets. If you use margin to buy a share of Starbucks, great. If you use it to buy a coffee, you’re out of luck.
Well, in theory stocks are valued based on their projected future performance. See also the efficient market hypothesis. Even if not true, there's no reason to think someone selling shares to cover purchases would have any insights on how to outperform.
Maybe what you're getting at is that in this case the seller has no opportunity to set an asking price, and is simply accepting the current market value? If this really took off that would be an issue, but I can't see why this would take off.
TLDR: Don't confuse investments with pocket money. The reason why there is some friction to selling stock is because the owner and buyer need to decide what the value of that stock is. A point-of-sale transaction is a poor place to determine the value of a stock.
(Long answer)
Because then the question is, who are they selling the stock to?
Many years ago, I interviewed with a company that described an elaborate scheme to reduce the cost of trading stock. Basically, if you're a website where people manage their stock portfolio, you can save on transaction fees by keeping as many trades as possible among your users. As far as the stock market is concerned, no sale occurred.
In this case, the only way to make it work is if the credit card has a whole bunch of buyers lined up for all of the various stocks that are sold whenever the card is used; AND is willing to float about 0.753782 shares of Tesla. This way they can let you sell 0.0001 share to pay for your stick of gum without them incurring the transaction cost of a share trade.
The problem is that, when you invest in something, you need to actively decide when to buy, hold, and sell. If you had such a system, you would need to tell it that you want to sell your Tesla when you buy coffee, but hold your Apple. (Otherwise, you'd want to back it by a mutual or index fund, or ETF.)
Or, another way to do it would be to have a card for each of your investments, and you actively choose which card you use at the point of sale.
(IMO, it's easier just to sell an investment when you pay your credit card bill.)
I'm paid partially in stock, still pay normal income tax of the value of the stock the day it's granted
If median income people will keep all their money in stocks, then things may change quite drastically. I am wondering if this would have any power to affect the inequality gap.
As the author mentions, there is some similarity to crypto. For instance, one could use crypto to pay for things but it is infeasible in practice because in the US you would have to pay taxes on every buy trade.
For one, we'd expect average returns to go down. The flip side of that is corporate financing gets cheaper, which could spur new capital formation.
Really? Buying high and selling low is a time-honored way of losing money.
If you plan to hold for less than 10 years, then things are much more uncertain in both directions.
Is it safe to assume that stocks over the next 30 years will return more than the 2-and-a-little % of 30 year government bonds right now?
1989-2019 with dividends reinvested and inflation controlled show a return of 7.3% in the S&P 500 index. But 1959-1989 with the same parameters shows a return of 4.96% by just moving the time period back 30 years.
Arbitrary endpoints can make you justify anything, including double digit returns. But people who are saving money in the equities market that gets ever more crowded with index funds and ever more efficient should probably not count on 7-8% returns as the canonical amount they're getting back. They should plan on 5% or lower and be happy with higher returns if they come.
The P/E ratio of the S&P 500 got into the 7s!
So why does historical experience show that inflation is so bad for stocks, if it seems logically to you to be good?
It seems possible that is the way in which the future will resemble the past.
30 year treasuries currently yield 2.35%, so it seems to me going out on a limb to assume that efficient markets allow for stocks to be significantly better.
The rate for long term treasuries in the very early 80s was right in the double-digit or near double digit range that people now feel entitled to for stocks. With bonds, you can't deceive yourself as easily about the possible future. So doesn't that constrain stocks?
https://www.macrotrends.net/2521/30-year-treasury-bond-rate-...
...and if market returns over the next 30 years are going to be 2.35%, and you get to pay taxes and then have even minimal inflation, then it looks kind of irrational to take any risk at all, unless you basically have the same psychology of a lottery player.
That's not really enough to make you rich unless you're already rich, but it's enough to take a comfortable salary and turn it into a comfortable retirement. If you're on a minimum-wage, hand-to-mouth [or less] salary, yeah, you're still boned, and investing in the market isn't an option when you need every dollar available right now.
Median income people can't keep all their money in stocks consistently. At that level of income, they frequently need to draw against their savings (or more commonly can never allocate it all consistently into the market in the first place). That's a critical separation point between being at the median and being in the upper economic tiers: the need (or lack thereof) to tap your capital for major life expenses.
At a median income, step one is to have a cash buffer for emergencies. Just accumulating $5,000 in stray cash in your bank account as a life buffer is often difficult at a median income. Some emergency always wants to deplete it or otherwise move it backwards.
The reason median income persons can accumulate wealth in a house is because they require shelter. That ownership is often an expensive form of shelter and a mediocre form of investing (with a typical house property taxes will often wipe out between 1/2 and all of your home's value gain over time, if you're lucky enough to have any real value gain at all; throw in maintenance costs; then mortgage interest costs will smash another large share of your gains from actually paying down the mortgage; it's inevitably like burning a dollar but saving one corner of it and pretending it's a great form of wealth formation), however since they do require shelter regardless, it ends up acting as a very slow building form of wealth formation (via home equity).
You're at the median income. You've been careful and have accumulated $100,000 in the market. You require $50,000 of that for education expenses for your 15 year old child (you've known that all along and have expected to task a portion of that capital to that expense). 2008-2009 happens, the market tanks, it's the end of the world (according to the headlines). After the decline now you have $60k in the market and it's the year 2010. What do you do: pray it doesn't decline further or pull the capital and safeguard the required $50k? How confident are you vs your situation, circa 2010, that things are going to be ok with the market?
It's a simple example, however it perfectly illustrates why median income persons struggle to do what you're proposing. And that's a very conservative scenario that doesn't get into the countless other life emergencies that will come for you over eg 20 years of trying to build a consequential portfolio at a median income. It's not impossible, it's very difficult.