Introduction to stock ownership
Individual stock ownership is one of the most basic and passive ways to grow wealth. However, it is also one of the riskier ways to increase your net worth since you only control two things: when to buy and when to sell stocks. The rest is up to the company’s management to increase shareholder value and profitability. So why do people invest in stocks of companies in which they have little say?
Passive income streams with stocks
There are two ways to profit from individual stock ownership: Capital gains and Dividend income.
Before you can take advantage of these sources of income, you have to start by opening an account Brokerage account With a reputable broker. You will have to decide between Individual retirement account (Ira) and A Non-retirement account Where you can buy, hold or sell your stocks.
The type of account that is “right” for you depends on how much money you have to invest and when you need the income.
Capital gains income
Capital gain is simply the increase in the price of a stock above the price at which you purchased it (For example, you bought for $10, today’s price is $30, you will make a capital gain of $20). So, you can continue to invest in different stocks, and as the price rises, your unrealized capital gains (lingo for not yet sold) will continue to increase.
In a non-retirement (or taxable) account, you will be taxed on capital gains as soon as you need the money you earned passively by selling stocks. In an IRA, stocks can be bought and sold repeatedly without having to worry Capital gains taxBut there is rules About withdrawing money from an IRA. It’s not the most passive income you can get as you had to make the decision to sell to get the income into your bank account but you also didn’t have to do anything to increase the value of your shares.
You might be thinking to yourself either:
A – This is great, I’ll be watching tons of YouTube videos about stock trading!
or
B – I don’t have time to learn how to trade stocks, what else do you have?
Don’t worry, if you’re nervous about timing the market (a term for when to buy and sell stocks), there are stocks that not only give you capital gains, but cash, too!
Dividend income
Sometimes companies have a lot of cash, and to incentivize investors (you) to buy their stock, they will offer a dividend (cash) for every share you own in the company. These dividends can be paid monthly, quarterly, semi-annually or annually depending on the company. It is possible to invest in different companies that pay out in different weeks of the year so that you can receive new profits every week!
As you may have already assessed, having it in an IRA means deferring taxes until you make a withdrawal. In a taxable account, it is taxable in the year it is received.
Dividend investing is interesting because while you receive income, the stock price and dividend amount can increase over time. This means that not only can the value of your account be increased, but also the income it generates. The only decision you have to make is when to buy more shares, which can be done automatically Or on your own time.
This investment method becomes more powerful as you continue to invest new money and reinvest dividends to buy more and more shares. Then one day, when you need income, you can stop reinvesting and start using the income you’ve been buying.
There are a lot of Strategies About how to invest in stocks and the decisions you need to make about how to make passive income that’s right for you. However, the most important decision to make is to get started!