How to generate passive income. Stocks and shares (Part 1)
Today owing to financial crisis and existing in all times desire to increase earnings more and more people are looking for additional income, and more often they are interested in passive income. But let's first of all differentiate these two notions: active income and passive income. The main point of active income is that you do some work in the office, enterprise, factory or somewhere else and receive income in proportion to your efforts applied. That is you work for a salary. In other words, if you have worked 8 hours 5 days a week during a month - receive your salary for this month, but if you failed or was unable to work - you wouldn't receive anything.
The essence of passive income is fundamentally different: once you've made a good job, you receive income from it over a long period of time or even lifelong. You want examples? e.g. writing a book or music, investment in growth stock, gaining from visitors of a site and many, many other ways.
As you see from these examples, the main difference of passive and active incomes is that you continue to receive money even after to stopped apply any efforts or do the job. Another "pro" of passive income is that your operating schedule remains flexible.
So I won't discover America if I say that passive income is more acceptable and desired for the majority of people.
Owing to development of technology, today you can earn money not only in traditional way, but on the Internet as well. And I think that it's logical to single out:
- Traditional ways shares of receiving passive income
- And ways to get passive income via the Internet.
What are shares?
Shares are documents issued by a company, which entitles its holder to be one of the owners of the company.
Professional investors buy shares in the hope of benefiting from a rising stream of income over the long term. Shares entitle their owners to vote at a company's Annual General Meeting and to receive a proportion of distributed profit in the form of a dividend.
The stock exchange itself isn't open to ordinary investors; instead, they have to buy shares via a stockbroker. Many banks and financial institutions offer this service in return for a commission.
Types of shares
Ordinary shares (common stock) bear the largest part of risk, but the returns can be much higher than with other forms of investment. Common stock represents more effective ownership and control, because it's, with some exceptions, the voting stock. Holders of common stock have the right to choose company directors. Each share of common stock affords its holder one vote.
Holders of common stock are entitled to receive company earnings reports, and they may attend annual meetings and vote on company policies. The disadvantage of common stock is its minimal claim on company earnings. Dividends on preferred stock must be paid first and in case of company failure, it's holders of bonds and preferred shares who have first claim on assets.
Preference shares (preferred shares) have a fixed dividend which must be paid before the ordinary shareholders can receive their dividend, which guarantees a return on investment as long as the company is making profit. If the company is liquidated, the preferred stock is paid off before the common stock is, but after the bonds are.
Dividends on preferred stock generally are fixed and cumulative. They do not increase if the company prospers. They may, However, be reduced or suspended if earnings are poor. If they are reduced or suspended, they cumulate and are paid when earnings improve.
The right to convert is an option investors who prefer to receive a fairly certain income rather than exercise the rights of ownership.
Shares are traded in two kinds of markets: primary and secondary. When a corporation decides to issue stock to the public, it's undertaking a primary distribution. This first sale of stock is in the primary market, and the money received goes to the company.
If everyone who bought stock simply kept it and waited to collect dividends, there would be no secondary market. The main reason for buying stock, however, is speculation the hope that the value of the stock will increase so it can be sold at a profit. Owners of stocks are continually in the business of trying to better their fortunes by selling and buying stock in the secondary market. When stocks traded in the secondary market, none of the money goes to the company that originally issued it. It goes to the seller, minus a commission for the broker.
A stock exchange is an organization that provides a marketplace (either physical or virtual) for trading shares, where investors (represented by stock brokers) may buy and sell shares in a wide range companies. In the USA, through the inter-market quotation system, stocks listed on one exchange can also be bought or sold on several other exchanges, including relatively new internet-only exchanges. Many large foreign companies choose to list on a U.S. exchange as well as an exchange in their home country in order to broaden their investor base. These shares are called American Depository Receipts (ADRs) - or, in case of companies such as UBS and Daimler Chrysler - "foreign ordinary shares". Large U.S. companies also list in foreign exchanges for the same reason.
There are various methods of buying and financing stocks. The most common means is through a stock broker. Whether they are a full service or discount broker, they arrange the transfer of stock from a seller to a buyer. Most trades are actually done through brokers listed with a stock exchange, such as the New York Stock Exchange.
There are many different stock brokers from which to choose, such as full service brokers or discount brokers. The full service brokers usually charge more per trade, but give investment advice or more personal service; the discount brokers offer little or no investment advice but charge less for trades. Another type of broker would be a bank or credit union that may have a deal set up with either a full service or discount broker.
There are other ways of buying stock besides through a broker. One way is directly from the company itself. If at least one share is owned, most companies will allow the purchase of shares directly from the company through their investor relations departments. However, the initial share of stock in the company will have to be obtained through a regular stock broker. Another way to buy stock in companies is through Direct Public Offerings which are usually sold by the company itself. A direct public offering is an initial public offering in which the stock is purchased directly from the company, usually without the aid of brokers.
Selling stock is procedurally similar to buying stock. Generally, the investor wants to buy low and sell high, if not in that order (short selling); although a number of reasons may induce an investor to sell at a loss, e.g., to avoid further loss.
As with buying a stock, there is a transaction fee for the broker's efforts in arranging the transfer of stock from a seller to a buyer. This fee can be high or low depending on which type of brokerage, discount or full service, handles the transaction.
After the transaction has been made, the seller is then entitled to all of the money. An important part of selling is keeping track of the earnings. Importantly, on selling the stock, in jurisdictions that have them, capital gains taxes will have to be paid on the additional proceeds, if any, that are in excess of the cost basis.
In the end of talk about shares I want to add that to have stock is more profitable than to have money. The reason of it is inflation. If you save money each month, inflation eats it up, and the price of your money falls. Today you can not buy the same amount of goods you could for instance five years ago, because at present these goods cost higher. Inflation caused a markup. But inflation helps shares. Shares are holdings in this or that company, in other words they are a holding in goods or real estate; if prices for all the goods become higher in some time, the value of your shares increases.
It's impossible to describe all the secrets of trading in shares here, but there is a good book written by one of the most famous traders of the XX century Jesse Livermore "How To Trade In Stocks", I advice to read it, it really worth reading and can help in future.
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