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Passive Income 101 – Stocks

 

Passive income 101 StocksThis is the next instalment of our Passive Income 101 Series. If you would like to get all of these posts in a nice guide simply si
gn up for our mailing list and I will send it to you when it’s done.

 

What is a Stock?

 

A stock is defined as: the capital raised by a business or corporation through the issue and subscription of shares. (yawn)

 

English please

Basically, a stock is ownership in a company, for every share you own you can get a voting right with the company. But don’t get too excited. You can’t just go out and buy a share in a company and expect to walk into that company and start bossing people around.

 

As an Google shareholder you don’t get free Google merchandise, or the CEO’s home phone number. (Full disclaimer, I don’t own Google stock).

 

There are usually millions of shares issued and the decision get put to a vote at an Annual Shareholders Meeting. Which you are allowed to attend since you have an ownership in the company.

 

Why do companies do this?

When a company needs money, they can issue debt (sell bonds) or raise capital through the sale of shares (i.e. stock).

 

Stocks for a company trade on the open market and are actively traded through out the day on various exchanges. A stock price can change wildly through out the day depending on the news that is released around it. There are also stocks that don’t trade on the open markets, but right now we will focus on stocks that do.

 

There are all types of stocks that you can get, penny stocks, mid cap, small cap, large cap, blue chip. All of them carry various risks and rewards. For more on the different types of stocks and their classifications check out this great link at Investopedia

How do stocks make money?

 

Stocks make money in two ways typically, there are also some option strategies, but that’s for another time. Plus, there’s a host of other ways to make money in stocks (arbitrage comes to mind, shorting etc…), but for 101 we are looking at the 2 basic ways of making money with stocks.

For most of us this will be how we make money in stocks.

Appreciation (A.K.A. Going Up!) 

 

This is when you buy a stock and it goes up. Hooray! It’s also how the majority of people try to make money in the stock market. There are other ways, but this is the beginning and we will keep it simple. Trust me it can get complex along the way, if you want it to. But for right now let’s just keep it simple! 🙂

 

Dividends 

 

Passive income 101 StocksA dividend is a sum of money paid to the shareholders of a company typically on a regular basis (Quarterly or Annually).

 

Now in basic english here is what it means. When a company you own makes money, it’s called earnings. With that money (earnings) a company can do a lot of different things.

 

First they can re-invest in themselves by creating new products, buying other businesses, or pay down their debt.

 

Secondly, they can buy shares back on the market. Which increases the value of the shares in theory.

 

Thirdly they can pay their shareholders dividends.

 

Why invest in stocks?

Let’s be frank, stocks are dangerous. They are an unknown. Don’t let anyone tell you differently.

 

Nobody knows where a stock will be tomorrow, let along 5 years from now.

 

I’ll repeat that, since most of us investing in stocks want the hot tip:

 

Nobody knows where a stock will be tomorrow, let along 5 years from now. 

 

So why choose stocks?

 

As far as “Passive Income” goes. Dividends from stocks are about as passive as you get. Apart from interest on your money, stocks can offer you the best upside returns compared to other passive investments.

The Risks of Investing in Stocks.

You can lose all of your money. There, I said it. I’ve also done it. 🙁

 

That’s the biggest risk.

 

Actually, if you start to use leverage and buy things on margin (using money that isn’t in your account, but the brokerage loans it to you) then you can lose even more than your money.

 

I stay away from investing on margin. I don’t have the stomach for it. I want to buy stocks and forget about them, knowing that they are going to be paying me dividends for a long time.

 

But there you go… When you are just buying stock all you can use is your money. If you are buying on margin, or doing other crazy stuff you can lose more than just your money. Don’t worry we aren’t covering those types of shenanigans. This is more for those who want to buy and hold good stocks.

The Costs of Buying and Holding Stocks

 

There are a few costs to consider when looking at buying stock.

 

Commissions

 

There is the commission you will pay to the broker.

 

For stock investing I use Questrade. This is where Questrade comes in with their democratic pricing. You pay only $0.01 share. With a minimum of $4.95 and maximum of $9.95

 

Even better, if you are buying ETF’s Questrade doesn’t charge you a commission!

 

What’s an ETF?

 

It stands for Exchange Traded Fund. It’s like a owning a basket of stocks or other type of investment. They are considered less risky than individual stocks.

 

Holding Stock Costs

Most of the big banks, if not all of them, charge an annual maintenance fee. That means you have to pay to keep your account with them. I know a lot of us hate fees and what they can do to our finances so here’s another big plus with Questrade which doesn’t charge holding fees

 

Here’s the takeaway:

If you are looking to get started in stocks you should take a look at this post which walks you through setting up your first brokerage account. It’s through Questrade which I have used for 8 years and highly recommend.

 

In Conclusion

 

Stocks are one of the more passive of the “passive incomes” out there. That doesn’t mean they don’t come with their own risks and pitfalls. If you are considering investing in stocks remember something I once read when I was starting out in stocks.

I’m paraphrasing here:

 

“The stock market is the only place where you can buy a book for $19.99 one night and start investing the next morning. Remember you are going up against people who have PHDs and MBAs and have been doing this their whole career. You wouldn’t read one book on brain surgery then start operating, but when it comes to stocks we tend to forget that.”

 

P.S. If you subscribe to our newsletter you will get the Passive Income 101 guide when it’s complete. Just one of the perks for being a part of our community. You can sign up for our newsletter here or in the box below.

 

 

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