Intro to Stock Ownership
Individual stock ownership is one of the most foundational and passive ways to grow wealth. However, it is also one of the riskiest ways to increase your net worth since you only control two things: when to buy and when to sell shares. The rest is up to the company’s management to grow the value and profitability for shareholders. So why do people invest in the shares of companies they have little say in?
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 streams of income, you’ll begin by opening a brokerage account with a reputable broker. You’ll have to decide between an individual retirement account (IRA) and a non-retirement account in which to buy, hold, or sell your stocks.
The “right” account type for you depends on how much money you have to invest and when you need the income.
Capital Gains Income
Capital Gains are simply the increase in the stocks price above the price you bought it for (ex. you bought at $10, today’s price is $30, you would realize a capital gain of $20). So you can keep investing in different stocks and as the price goes up your unrealized (lingo for haven’t sold yet) capital gains will continue to increase.
In the non-retirement (or taxable) account, you will be taxed on the capital gains once you need the money you’ve passively made by selling the stock. In the IRA, stocks can be bought and sold repeatedly without worrying about capital gains tax, but there are rules about withdrawing the money from the IRA. Not the most passive income you can obtain since you have to make a decision to sell to get the income in your bank account but you also didn’t have to do anything to grow the value of your shares.
You may be thinking to yourself either:
A – This is awesome, I’m going to watch a ton of Youtube videos on trading stocks!
B – I don’t have time to learn how to trade stocks, what else do you have?
No worries, if you are nervous about timing the market (lingo for when to buy and sell stocks) there are stocks that give you not only capital gains, but also cash!
Sometimes companies have a lot of cash and to incentivize investors (you) to buy their stock they will offer a dividend (cash) for each share of the company you own. These dividends can pay out monthly, quarterly, semi-annually, or annually depending on the company. It’s possible to invest in different companies that payout on different weeks of the year so that you can get a new dividend every week!
As you may have already assessed, owning these in an IRA means taxes are deferred until you make a withdrawal. In a taxable account, they are taxable in the year they were received.
Dividend investing is interesting is because while you are receiving income, it’s possible for both the share price and the amount of the dividend to increase over time. That means not only can the value of your account increase, but also the income it produces. The only decision you have to make is when to buy more shares which could be done automatically or on your own time.
This investing method becomes more and more powerful as you continue to invest new money and reinvest dividends to buy more and more shares. Then one day, when you need the income, you can stop reinvesting and start using the income you’ve been buying up.
There are lots of strategies of how to go about investing in stocks and decisions you’ll have to make about how to produce the right passive income for you. However, the most important decision to make is to start!