Content of the material
- The difference between dividends and interest
- 6. Trade options
- Investing in Real Estate
- Invest Smarter with The Motley Fool
- 4. The key is to diversify
- Which passive income source is best?
- How can I make passive income with no money?
- How can I make passive income with money?
- 2. Invest in a money-making course
- Earn Compound Interest
- Use Market Data to Guide Your Decisions
- Sell Short
- 3. Reinvest Your Dividends
- The Bottom Line
The difference between dividends and interest
Don’t confuse dividends with interest. Most people are familiar with interest because that’s how you grow your money over the years in the bank. The important difference is that interest is paid to creditors, and dividends are paid to owners (meaning shareholders — and if you own stock, you’re a shareholder because shares of stock represent ownership in a publicly traded company).
When you buy stock, you buy a piece of that company. When you put money in a bank (or when you buy bonds), you basically loan your money. You become a creditor, and the bank or bond issuer is the debtor; as such, it must eventually pay your money back to you with interest.
6. Trade options
When it comes to options, Tom Sosnoff at Tastyworks says, “Trade small and trade often.” What type should you trade? There are loads of vehicles, such as FOREX and stocks. The best way to make money by investing when it comes to options is to jump in at around 15 days before corporate earnings are released. What type should you buy? Money calls.
The optimal time to sell those money calls is the day before the company releases its earnings. There’s just so much excitement and anticipation around earnings that it typically drives up the price, giving you a consistent winner. But don’t hold through the earnings. That’s a gamble you don’t want to take if you’re not a seasoned investor, says John Carter from Simpler Trading.
Investing in Real Estate
Another option for creating a monthly income stream is investing in rental real estate properties. This requires significant cash up front, and you need to be able to maintain the properties on a professional level. You also have the option of hiring an agency to manage the properties, but that will cut into your income.
It's also possible to have a partner who handles the property management. While rental income can supplement your income, you also have the option of selling the properties for a significant profit if the market is good for sellers.
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4. The key is to diversify
The key, experts say, is to diversify, which means have a variety of investments in different things. Don't put all of your eggs in one basket. That keeps balance, and if one investment is going down, another might be holding steady or going up.
For example, if your investments are all in tech and all of a sudden the tech sector starts sliding, so is your portfolio, Sun explained. "If you have some in tech, maybe some in health care and those more traditional companies that pay dividends," Sun said, "then your overall portfolio is a little bit better balanced."
So, try to make sure you have investments across a wide variety of sectors (such as technology, health care, retail, financial, etc.) as well as risk levels. Growth stocks, for example, can gain a lot but also lose a lot. Value stocks are more steady growth. You can also invest in currencies, commodities and riskier investments such as cryptocurrencies and NFTs. Those tend to be more volatile and complex, so you really want to do your homework — and make sure you are only investing what you can afford to lose.
It's OK to get advice from friends when investing, but you need to do your own research and you need to be diversified. If your friend says buy XYZ stock because it went up for them, don't just buy that and leave it at that. It could go down for you. So, if you're diversified, you have a cushion for that.
Which passive income source is best?
The question of which passive income source is best depends on several factors, but some of the most important include the amount of money you have to invest, the total opportunity size, your interest and ability in the area, the amount of time you need to invest and the potential to succeed. Typically, the lower the barriers to entry, the more crowded the field of competitors and the lower likelihood of success.
So you’ll need to weigh the opportunity against these factors and see which passive income strategy works best for you. But it can be helpful to have natural ability and an interest in your target area, because these can help motivate you in the early days when things are likely to be tougher.
There are passive income opportunities for people who are starting out with some money and even those who have no money to start.
How can I make passive income with no money?
If you have little or no money to start, you’ll have to rely mostly on your own time investment to power you through, at least until you build up a little money. That means focusing on passive income sources that take advantage of the following traits:
- An area where you’re an expert. Here you can build your expertise out into a useful product or service for consumers, e.g. design, software coding and others.
- An upfront work-heavy opportunity. You’ll need an opportunity that requires a time or work investment, such as creating a course, building out an influencer profile or other options.
In effect, you’re substituting your time for your lack of capital, until you can get enough capital to expand your set of opportunities.
How can I make passive income with money?
Money can provide you with more passive investment opportunities. If you have money to invest in a passive opportunity, you have not only the opportunity set above but a new range, too. Money is a prerequisite for taking advantage of the following passive income areas:
- Investing in dividend stocks or REITs. Investing in stocks means you need money upfront, but you’ll receive some of the most passive forms of income around.
- Save with bonds or CDs. Other purely passive activities include buying bonds or CDs.
Here you can use your money to make money with little or no effort on your part, if that’s what you’d like to do. Of course, you could pair your money with a lot of time investment to move into an even more lucrative niche, too.
2. Invest in a money-making course
Investing in yourself is one of the best possible investments you can make. While you might not be able to pinpoint an actualized return on investment, there’s no money that’s better spent. Invest in yourself. Invest in your education. Learn. Adapt. Grow. Discover what you’re passionate about.
There are loads of money-making courses on the internet. The hard part is choosing the right one. From ebooks to social media marketing, search engine optimization and beyond, the possibilities are endless. While many money-making gurus might pop up on social media, not all courses are created alike. Spend time doing your due diligence and research to choose the one that’s right for you.
Earn Compound Interest
The main reason the stock market has been such a tremendous wealth generator is the effect of compound interest. While you can make short-term profits in the stock market, it’s actually a safer bet to leave your money in the market for the long term and let compound interest do its magic. For starters, the longer you leave your money in the market, the less risk you actually take. While no one can predict what the market will do from year to year, the S&P 500 index has actually never lost money over any 20-year rolling period. That’s an amazing statistic when you think about how volatile the market can be over the short run. If you can keep your money in the market for 10, 20 or even 30 years, your potential to build wealth is tremendous. Think about it this way: If you put $10,000 in the market and earn 10% per year, taking out your profits each year, you’ll have a net profit of $30,000 after 30 years, or three times your money. But if you instead let that money compound every year at 10%, you’ll end up with just under $200,000, or 20 times your money. This may not be the answer that those looking for a quick buck want to hear, but the best, safest way to generate real wealth in the stock market is to stay in it. More From GOBankingRates 2022 Stimulus Checks: Is Your State Giving Out Money This Year?Nominate Your Favorite Small Business To Be Featured in GOBankingRates’ 2022 Small Business SpotlightWhat To Do With Your Money During High Inflation17 Biggest Budgeting Mistakes You’re Making
Use Market Data to Guide Your Decisions
Market data refers to the price, bid/ask quotes, dividend per share (if applicable), market volume, and other market information. There is historical data as well as real-time data.
Whether you are more of a fundamental or analytical investor, this data is valuable. Data-driven decisions prevent impulsive and emotional purchases.
You can find some of these data points within your stock trading platform or on stock and investment websites.
Additionally, commonly-available information to you in most online brokerage accounts will show you the current share price, the 52-week range, market capitalization, volume, and more.
A short seller essentially bets that a stock’s price will fall. Technically, a short seller borrows shares of stock, sells them, then buys them back and returns them to the lender. If the stock price has fallen in between these two transactions, the short seller turns a profit. But if the stock instead rises, then the short seller loses. In many ways, short selling is like day trading, meaning it’s a quite aggressive strategy. As the long-term trend of the market is strongly up, a short seller must have a compelling reason for believing that a specific stock or index will fall. Macroeconomic factors, an overvalued stock price or a deteriorating business are all reasons that might cause a stock to fall, but they are not guarantees. In a booming market, even stocks that are “overvalued” or unprofitable may continue to rise. Like day trading, short selling can be profitable, but it takes a very astute or professional trader to do so.
3. Reinvest Your Dividends
Many businesses pay their shareholders a dividend—a periodic payment based on their earnings.
While the small amounts you get paid in dividends may seem negligible, especially when you first start investing, they’re responsible for a large portion of the stock market’s historic growth. From September 1921 through September 2021, the S&P 500 saw average annual returns of 6.7%. When dividends were reinvested, however, that percentage jumped to almost 11%! That’s because each dividend you reinvest buys you more shares, which helps your earnings compound even faster.
That enhanced compounding is why many financial advisors recommend long-term investors reinvest their dividends rather than spending them when they receive the payments. Most brokerage companies give you the option to reinvest your dividend automatically by signing up for a dividend reinvestment program, or DRIP.
The Bottom Line
Yes, you can earn money from stocks and be awarded a lifetime of prosperity, but potential investors walk a gauntlet of economic, structural, and psychological obstacles. The most reliable path to long-term profitability will start small by picking the right stockbroker and beginning with a narrow focus on wealth building, expanding into new opportunities as capital grows.
Buy-and-hold investing offers the most durable path for the majority of market participants. The minority who master special skills can build superior returns through diverse strategies that include short-term speculation and short selling.