As investors, we always want to double our money to generate more assets and grow our investments. Relying on a single source of income is risky because you need a backup plan if that fails.
Having multiple income streams for investors can help you earn more by exploring profitable chances in different areas like capital gains, options, and dividends.
At Buffett Online School, we believe in investing in great companies you understand and utilizing Free Investing Resources to kickstart your investment journey is one of the best ways to learn.
This article will discuss the top income streams for investors to help you maximize your earnings and grow your money over time, which Chloe Lin shares in her TikTok video.
Different Income Streams for Investors
Capital Gains
Capital gain is the profit you gain when you sell something for more than the original price. Almost anything you own, whether it's an investment like stocks or personal items like furniture, can give you a capital gain.
You determine the gain by subtracting the purchase price from the sale price. The tax department (IRS) sometimes taxes you on this profit.
Capital gains have two categories:
Short-term capital gains: Profit from selling assets you've had for a year or less.
Long-term capital gains: Profit from selling assets you've kept for over a year.
You need to report both types of gains on your yearly taxes.
This difference matters, especially for online traders and day traders, because of the quick buying and selling they do.
Realized capital gains are when you sell an asset, and that's when you owe taxes. "Unrealized" gains (or paper gains) happen when an asset's value increases but isn't sold.
For instance, if you have a stock that's risen in value but has not sold it yet, that's an unrealized gain.
Dividends
Dividends are a share of profits that companies give to their shareholders. They're a regular way for investors to make money from stocks. Companies can pay dividends in cash, which you can put back into investments or take out and spend.
Another way to receive dividends is through extra shares, known as a stock dividend. However, not every stock offers dividends. You must pick specific dividend-paying stocks to earn from dividends, often discussed in the news. These stocks can be a safety net in times of high inflation.
Firms that regularly increase dividend payments are usually more stable than the overall market. Some even increase dividend amounts during inflation. Consistent dividends can also balance out overall stock returns.
5 Types of Dividends
1. Cash Dividends
Cash Dividend is the usual way companies distribute profits. Shareholders get cash directly from their brokerage accounts.
2. Stock Dividends
Instead of cash, companies give out extra shares to shareholders.
3. Dividend Reinvestment Programs (DRIPs)
Shareholders can use their dividends to buy more of the company's stock, often at a reduced price. While this option is available, it's not compulsory. Investors can opt for cash if they prefer.
4. Special Dividends
These are one-off dividends given to all common stock shareholders. It's like a bonus when a company has extra profit that it doesn't need immediately.
5. Preferred Dividends
These are for people who own a special kind of stock called preferred stock. It's a mix between a stock and a bond. The dividends for this are usually set and are paid regularly, often every quarter. It is typically fixed, unlike common stock dividends, which can vary.
Options
An option is a financial tool that depends on the worth of stocks or ETFs. It lets the person who buys it choose to buy or sell the main item based on their type of contract. But, unlike futures, they don't have to make the trade if they don't want to.
Each option has a deadline and a set price called the strike price. People usually trade options through online platforms. Options let traders have a significant position in an asset without buying the actual purchase.
They help investors protect their money or even make some more. For example, they're a direct way to invest in oil. Looking at the daily trades and the total number of open contracts for those trading options helps make smart choices.
Types of Option
Calls
A call option lets you buy an asset at a set price before a certain date, but you're not forced to. If the security price goes up, the call option becomes more valuable.
Buying a call option means you're hoping the price will increase. You can make a lot, but the most you can lose is the cost of the option itself.
Puts
A put option lets you sell an asset at a set price before a specific date. If the security price drops, the put option becomes more valuable.
Buying a put can be seen as betting against a stock. It's like insurance: if the stock price falls, the put protects you by increasing value.
It's a good idea for investors to have different ways of making money. It helps lower the chances of losing everything and increases the possibility of earning more. If you only depend on one way to make money and it doesn't work out, you could be in trouble.
Having more than one source of income is like having a backup plan in case things don't go well.
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