On Credit Card Purchase

Although these operations are known as operations on credit the reality is that they are cash operations in which a credit is given to the buyer (lending him money). The most common case of a buyer using a credit is when the quotation of the securities are going to rise.

The mechanics for purchasing on credit is the following:

The purchaser gives to the intermediary and order to buy a credit

The purchaser is asked to deposit the stipulated guarantee and to finance the operation with funds obtained through the corresponding member of the stock exchange market. The terms of the credit usually fluctuates in between one and three months.

The purchaser on credit gives an irrevocable sales order to the intermediary

The stock exchange market watches over the securities and in case the purchaser does not fulfill its compromise, it sells them to recover the loan. So, the securities bought this way remain deposited in the stock exchange market to in this way guarantee the well ongoing of the operation. In case the bought securities losses its value. The stock exchange market will demand the purchaser to give some additional guarantees.

The buying of securities on credit (also called cash purchase operation on credit) is usually done when you foresee the rising of the same. The purchaser on credit buys securities today, without having the total amount of money, for the n to sell them in the future at a higher price. In this case the method would be the following:

The purchaser on credit acquires the securities without paying for them, but he deposits a guarantee. Apart from the usual costs (brokerage and stamps) he must pay an opening commission and some interests for the difference that are charged at the end of the operation.

At the end of the agreed term that could be extended (when renewing, you pay the expired interests and the opening commission), the purchaser on credit sells the security and does not collect the sale, but he receives a liquidation in which the sum of the sale minus costs and plus the deposit made as guarantee, less the debit of the received credit and deferred interests that are subtracted is collected as a result. The term fluctuates in between three and twelve months.

If the securities have risen the on credit purchaser obtains a profit.

He can also cancel the credit and retire the securities and guarantees

The credit can be canceled at any moment. For it, the on credit purchaser has to pay the money he still owes and to retire the securities he left or well to order the anticipated sale of them.

Example of an on credit cash purchase: an investor acquires 5 shares of X company at 160%, being the nominal value of each share 1,000 money units. Therefore, the cost of the purchase adds up to 8,000 m.u. If the guarantee to deposit is 40%, the credit will rise to 4,800 m.u., and the initial guarantee to 3,200 m.u. Elapsed the term of credit, the purchased securities may have risen, fallen in their price or might have maintained. Its cost. In the case that it would perceive 9.000 m.u. (5 securities at 1,800 m.u. each). Therefore, the on credit purchaser has gained 1,000 m.u. from which he will have to subtract the interest of the formulation and the costs of the operation.

If securities prices would have fallen, the on credit purchaser would have losses.