Income Generation from The Stock Markets: Tips for The Beginners

Summary

• With an aim be financially independent surplus cash could be used to buy stocks
• It is important to factor diversification while investing in the stock markets
• People should invest in assets which would generate passive income in the future

Most people strive to achieve a financially independent status in today’s world. With rising incomes, smarter savings and smarter living strategies, people tend to achieve this status as early as possible. Being financially independent allows a person to spend the rest of his/her life without any source of income. A financially independent person does not have to worry about his/ her employment. It is about attaining financial freedom by being self-reliant and not being dependent on others.

So, how do we achieve financial freedom? To achieve this, we would need to understand the concept of passive income. Broadly, there are two types of income, namely, active income and passive income. The money we earn from our jobs is active income. The money which we make without working, such as interest income or rental income is called passive income.

We cannot keep working for our entire life; therefore, everybody should have a source of passive income. Active income is not scalable, meaning you can work only for a certain number of hours per day. Passive income is scalable, meaning passive income is directly proportional to the underlying assets. An increase in assets would lead to an increase in income levels. Active income is generated while we work, while passive income could be generated even while we are sleeping.

People should invest in assets which would generate passive income in the future. Stock markets are one of the avenues where these income-generating assets could be created. People new to the stock markets fear to invest as they find it too complicated with the jargons and terminologies used. In addition, people also tend to factor their age as it impacts their risk appetite. But the truth is, it’s not only the young, middle-aged as well as old people who can also consider stock markets for their investments.

Let us talk about some basics. Creating an asset would need investment. The idle money often termed as disposable income could be used to buy a stock or a bond. Buying a stock would mean purchasing a part of an individual company. Owning this small part of the company can eventually mean that we would be entitled to some part of the profits that the company makes. When the value of the company goes up, as its stock price goes up; this is how an investment made in stock appreciates over a period and could generate massive gains for an investor. Investing in Bonds is like lending money to someone in return for interest. It is a kind of debt security. In this article, we would discuss some tips which would help you towards attaining financial freedom by investing in stock markets.

• Keeping idle cash does not produce anything. Instead it depreciates in value. Once you have accounted for your expenses in the short-term, the surplus money should be used to create assets.

• First and the foremost thing, you need to find - a stockbroker, one who executes trades on your behalf with negligible brokerage charges and has access to a wider range of securities. This is a prerequisite for investing. Historically, the equity and debt instruments were bought in the form of physical certificates. Nowadays, we are blessed with online investment platforms that enable us to buy and sell securities at our convenience by just a click of a button.

• People new to stock markets can start from looking at the FTSE 100 index. FTSE 100 or Footsie index represents the hundred largest blue-chip companies in the UK, ranked by market capitalisation. The blue-chip companies have a global footprint, and chances of any price manipulations are close to zero. Investing in these stocks is considered more stable and less risky. Due to the economic impact of the novel coronavirus, the FTSE 100 index has taken a real hammering along with the rest of the stock market. The outbreak of the novel coronavirus struck the global markets at the beginning of this year. The stock markets saw severe wealth erosion which left investors high and dry. This triggered panic selling by investors. Most of the markets across the globe bled due to the economic impact of the deadly pandemic.

The FTSE 100 was hovering near 7,500 mark in the mid of February. It slipped to below 5,000 mark by the mid of March. Market experts believe that most of the blue-chip companies had undergone a steep price correction and have created a bottom in the mid of March when the nation went under lockdown phase. However, some of these stocks have rallied since then, and some of them have yielded double-digit return. Ocado Group (LON:OCDO) and Pennon Group (LON:PNN) have yielded double-digit return in the last six months. The government has backed the UK’s economy by offering a lot of stimulus packages. As the UK prepares for easing lockdown, the businesses are expecting sector-specific guidelines from the government to ensure safe operations. All these factors would surely work as a growth catalyst to grease the wheels of the businesses operating in the UK’s economy.

• It is important to understand the importance of diversification. A good mix of investments is a must while building an asset portfolio. A diversified portfolio helps in managing risks and benefits from long-term value. A beginner should ideally consider investing in low-cost index funds or ETFs to get exposure to a broad range of stocks. Volatility is something that investors must be prepared for, as cases for coronavirus continue to spread. Hence, investors can start investing small amounts by diversifying across asset classes and sectors and segments like bonds, equities, cash, and gold. A balanced portfolio helps a lot during uncertain times. However, an investor must ascertain his risk appetite before investing.

• It is important to read about the business before investing. Assessing the quality of the company, modelling its financials, and estimating the intrinsic value of the company are some of the skills of a good investor. According to market experts, an investor must be able to identify the cause of fluctuations in stock prices which are driven either by the underlying performance or market sentiment.

Amid the prevalent lower interest rates in the economy in the wake of coronavirus pandemic, stock markets present a better opportunity as compared to other investment avenues. There are defensive sectors like pharmaceutical, consumer staples and utilities which can be looked for stock selection and keeping the investments safe.