Suppose you read the article about earning passive income from Stocks And you don’t feel like you have enough time to research companies to buy. You may think that you need to pay your stockbroker/financial advisor 2% of your assets to buy it for you. Fortunately, there is a similar and cheaper option: cash!
Investment managers plan to buy Stocks, Bonds, Cryptocurrencies, Goodsetc., and prepare an attractive offer (prospectus) to investors explaining what will be purchased, how it will be managed, and how the investor will benefit from the investment. These investment products are called mutual funds or mutual funds ecom. xchange TRadd FExchange Traded Funds (ETFs) have fees that range from the previously mentioned 2% to 0.01% or even 0%!
Mutual funds
This is a basket of individual investments valued at their net asset value (NAV), and the collective value of stocks/bonds/etc. Net expenses and divided by the number of shares, which is the fund’s price. They are priced at the end of the market day to obtain the NAV value, so they are only priced once per day after the market closes.
One benefit is that you don’t have to worry about getting the “best” price on a particular day; everyone who buys fund shares before the market closes gets that day’s price.
Usually, similar to money market accounts, There is an initial deposit of between $1,000 and $100,000 depending on the fund.
You essentially own a share of the pie (a mutual fund) and each slice or share contains a portion of the components (individual companies) that make up the pie. The investment managers will then pay distributions to you in the form of dividends, capital gains or a return of capital on a monthly, quarterly or annual basis depending on the fund. This is interesting because instead of making the buy/sell decision of many different stocks, the investment manager will do it for you and send you returns in the form of cash just like dividends.
You’re probably starting to see why this is so attractive to a passive investor!
Exchange Traded Funds (ETFs)
Very similar to mutual funds!
One difference is that it is traded like a stock, and therefore has two prices: net asset value and market price. NAV is calculated in the same way as a mutual fund but the market price, like most stocks, takes into account supply and demand (investor sentiment) so it is possible to buy ETFs above/below their NAV which provides some opportunistic trading .
However, you can buy stock ETFs without an initial deposit just like with a mutual fund (i.e. an ETF worth $50 per share for an initial mutual fund deposit of $3,000).
How does this increase my passive income?
Both mutual funds and ETFs have different purposes.
Some are geared toward achieving tax efficiencies such as low income dividends and high price growth, others focus specifically on providing high income, and still others focus on beating inflation or the general market. As you buy more and more shares of the fund, your total “piece of the pie” will grow, entitling you to more returns!
You can buy more shares by investing your own money and/or reinvesting the income you received from the original shares to buy new shares. This is considered a “multiplier” when new shares purchased now produce income that can be used to purchase more shares, etc.!
Why do I want this passive income?
Instead of having to rely on your own analysis to find good stocks/Bonds Those that pay good dividends/interest income and know when to buy and sell them, mutual funds/ETFs will do the work for you and just send you the money! It will be your decision which investment product to buy and leave the rest to the professionals.
Also, depending on the fund you are dealing with, it could be dividends or capital gains income Tax advantaged. The income is distributed to your account And depending on your platform Settings, either put it in cash (in your account or bank account), or reinvest it in the same fund to buy more shares, or in another investment of your choice.
Risks and considerations
There are new products created every year by very good investment managers, but not all managers are right all the time. It is quite normal for managers to have good years and bad years (a bad year could be the S&P 500 gains 20% and the manager gains 15%, or the S&P 500 can lose -20% and the manager loses -25%).
It goes without saying that choosing the right investment product and manager is still very important. Due diligence It is still necessary even if you do not choose the underlying assets. Evaluating the longevity of the fund, how you will be taxed on the income, the costs you are charged compared to peer products, the performance of the fund, and the managers who make the decisions are all your responsibility if you want to have it. Income.
Clicking the ‘buy’ button and collecting income puts the ‘fun’ in the money, but you still need to make sure you are making a good investment decision that suits your circumstances.