Developing a Steady Income From Stocks
How to create an income from stocks? Before investing in stocks, you must learn how it works. Most people wish to own a company. We imagine how the owners of large companies earn money. We must have been thinking how fortunate they are in establishing such businesses. They must have started small before becoming big. If we want to become like them, we won’t have to establish our own. We can be a part owner of those same companies. But the question is how?
To be a part owner of a company, we should have shares in it. A part owner of a company is called a shareholder. In order to be a shareholder, we should purchase the shares of the company also known as stock. Stocks are traded in a market place called stock exchange. Every day, billions of dollars are traded in a stock exchange. In this kind of market, it is not a company’s product which is being bought and sold. Instead, it’s the company itself – the stocks. An individual can purchase stocks in many different stock exchanges such as the New York Stock Exchange (NYSE). To be able to do that, you need to have a broker that will help us look for stocks.
A broker is the one that comes in between buyers and sellers of stocks. When we buy stocks, we should go to a broker. And when another individual with existing portfolio wishes to sell his stocks, he should also go to a broker. On the trading floor of the stock exchange, there are dealers who will match both of these transactions. In other words, we can buy stocks when someone else sells. This is equivalent to a single stock trading transaction. Nowadays, trading in the stock market is done online using a trading platform that a broker will provide to its investing clients.
After getting familiar with the trading process, stock selection comes next. Our purpose is to create income from stocks. So, we should select the one that could bring it. Income from stocks has several forms as stocks have several types. There are two types of stocks: secondary and preferred. Secondary stock is a stock issued by a company for their expansion. This expansion brings additional fund and at the same time additional stockholders. Holders of this kind of stocks are entitled to a seat in stockholders meeting, right to vote, and dividend. Secondary stockholders enjoy the privileges of an owner of a company. On the other side of the coin, they also have the same accountabilities. If the company goes bankrupt, they will also share the same fate along with the rest of the stockholders. Their income from stocks depends on the company’s operation.
Meanwhile, preferred stock is a kind of stock issued by a company in order to raise funds for the company’s operation. But unlike secondary stock, preferred stock does not entitle the holders to the same privileges. Instead, it works like a bank loan. When preferred stocks are issued by a company, the buyers of these stocks will benefit from a guaranteed fixed dividend. Despite the absence of the privileges that a secondary stock can give, preferred stockholders don’t have any accountability. In addition, they create income from stocks by regularly receiving the fixed dividend without any regard to the company’s operation. Unconditionally, preferred stockholders are the first to receive the dividends. On the other hand, secondary stock dividends are decided in a stockholders meeting by a vote of the majority shares.
Income from stocks is determined by a company’s fundamentals. Every day in New York Stock Exchange, shares are traded for many different reasons. Traders are willing to buy a stock that promises good returns. Their decision to buy depends on the company’s position in its industry in which it belongs to. Some traders buy just to speculate. Others do it because of the future of a company. So, stocks are traded because of the different needs of many traders. If what we need is an income from stocks, we should buy stocks for that purpose. This means that our decision to buy is because we see that a company can offer so. A company that can consistently provide an income for the individual investors is called an income stock.
No one can tell us which company is an income stock. This can only be recognized by analyzing the factors that create an income from stocks. Good economic news may not always affect a certain stock. Sometimes, a company earns because of good management. It is complicated to analyze the market when dealing with stream of information. Hence, it is recommended that we also select relevant information. If our purpose is to create an income from stocks, we should focus on the direct fundamentals that explain the performance of a company. In order to recognize an income stock, it is reflected in its past dividend performance. A stock with good earnings per share ratio can show us the possibility of creating income from stocks.
Stock selection is crucial in creating income from stocks. It is not only the dividends that we should consider in selecting income stock but also its value. We could have an income from stock that regularly gives attractive dividends but it doesn’t make any sense if its value is worse. A poor performing stock in terms of valuation discredit its attractive dividends. If we decide to sell our stocks which suffer from devaluation for some reasons, our stocks may be much lower than the original amount that we invested. In this case, our regular income from stocks that we have enjoyed is only similar to an advance withdrawal. So, before buying any stock, we should look for the one of which the value may increase overtime. This is the one that most traders are willing to buy.
Another thing that we should consider before buying a stock is the return on investment (ROI). Stock devaluation is common in stock market. But many successful long term investors have very little concern about it because their income from stocks out of dividends is enough to offset the devaluation. In this situation, the value of stocks is not significant when the dividend gives higher ROI. This is only possible if our investment is long term. Assuming we bought a stock worth $10,000. After a year, the value became $9,000. However, the dividend was worth $2,000. So, our net worth in the first year was $11,000. Since our original investment was $10,000 and $1,000 was our income from stocks, our ROI was 10%. With the 10% income from stocks every year, it would take us 10 years to make another $10,000. In other words, our ROI was 10 years. In the 11th year, our income from stocks was $11,000 and our net worth was $21,000. If our original investment worth $10,000 was returned to our personal cash flow, our floating investment would be $11,000. In this example, it shows that an income from stocks through dividends can stand stock devaluation because of a long term consideration. This can also be possible if we reinvest the dividends. But if we don’t, our ROI will depend on the value of stocks. Of course, the actual amount of income from stocks varies depending on the financial capacity of an individual investor. If our investment is $100,000, the process will be the same but the result will be far more attractive.
In stock market, we must define our income. The longer the term we look forward, the more we should depend on dividends. However, if we want to get rich quick, we might as well resort to short term trading. In this kind of trading, a company’s dividend is less significant. Income from stocks in short term trading does not come from dividends but from the buying and selling of stocks and this is also known as stock market trading. So, whether you are a risk taker or conservative trader, there are many ways to create income from stocks.