What is the process of building passive income, and how to be financially free? The starting point varies according to the profile of an investor and of an investment itself. Some rich investors begin with a careful study of the factors that may affect their investments. Others begin by familiarizing themselves about everything. However, most of us begin with nothing even a capital. So, the less money we have, the longer the process of building passive income will be.
For an average person, building passive income should start from saving money. Saving money is very simple but it is hard to do for it requires patience and discipline. This is the best way to start the process of building passive income. Some people prefer to borrow money in order to invest. As time goes by, they will realize that it is not they who are earning passive income but the creditors are, instead. Credit is actually good especially for business expansion. But anyway, very few creditors lend to beginning investors.
In order to save money, we should reduce our daily expenses by identifying things which we can do without. Sometimes, we can’t help spending because it is important. But again, it depends on us how important these things are. We must set our priorities and set aside less important ones. For those who are really serious about building passive income, no set of plans are needed as their mindset is strong. They believe that saving money is not a physical movement of coins from one place to another but a game against themselves. If they spend, they will lose. If they save, they will win.
Having saved enough money, you will then think of where to put your money in. Assuming you don’t know what to do with your money, you would look for someone to help you answer all your questions in mind. Make sure that you will not do everything that he will say. It is better to make some research on your own. You might get bombarded with a lot of information that can confuse you. Don’t forget to filter it and be objective. The safest thing to do is to know the basic of the investment you may try.
The next step in the process of building passive income is the selection of investment. If your choice is to invest in stock market, you have to call a broker. A broker is a third party company that helps investors look for sellers when investors buy. And it is also the one that helps investors look for buyers when investors sell. Brokers charge a transaction fee after a single trade. Before you trade, the broker will ask you to open a trading account. You need to sign a contract and deposit the required minimum amount to open an account with the broker. Of course, you can deposit more than the minimum. Once deposited, your money is ready to be used when you start trading. Your payment for your stock purchased is credited to your trading account. Sometimes, it is also possible to purchase stocks without opening a trading account. In this scenario, you could use your checking account to pay for your stock purchase directly after the transaction. In the advent of technology, it is no longer difficult for any broker to facilitate the trades. Using a trading platform, investors can have access to live transactions. Trading platform is a software device used for trading stock market and the like. It also acts as a broker. A broker’s role nowadays is to stand as a guarantor to your trades. It means that its name is used for trading on your behalf.
Let us assume now that you have already opened a trading account and all the necessary trading tools have already been provided by your broker. You can now select a company to invest in. This stage in the process of building passive income is the most important stage because your future income depends on the company to be selected. Intensive research is needed in this stage. It is recommended you read the company’s fundamentals. Such information is provided in the platform that a broker will offer you.
In stock selection, you could find a lot of good performing stocks. Since you are building passive income, the first thing you have to consider is the company’s dividend. A company that has a regularly attractive dividend is also known as income stock. Income stocks are considered safe. In reality, nobody can tell you whether or not a company is an income stock. But you can recognize it by yourself if your research focuses on dividend.
Dividend is simply a company’s profit. Usually, it is distributed to shareholders every year. It has two types. One is called cash dividend; the other, stock. Cash dividend is expressed in checks. It is directly issued to shareholders. On the other hand, stock dividend is expressed in stock certificate. However, this is not directly issued to shareholders. Stock dividend is added to your total number of shares. It does not make your pocket full at the moment. But it expands your investment. Whether a dividend is cash or stock is voted and decided in a stockholders meeting. You may also attend a stockholders meeting because your shares entitle you to vote in it. So if you wish to receive cash dividend, you may vote for it.
Not all investors are the same. Some prefer regular investment growth. Others prefer cash. If you prefer only cash dividend, you may choose another type of stock that can give only cash periodically. There are two types of stocks: secondary stocks and preferred stocks. A secondary stock is exactly the one mentioned above. A preferred stock is different in the sense that it does not entitle you to vote and to attend a stockholders meeting. But it is so called because preferred stockholders are given priority in the distribution of dividends. Moreover, preferred stocks give you fixed income regardless of company’s performance. It is issued in fixed percentage like 10% or 15%. The percentage is your guaranteed dividend. Aside from that, the dividend is only cash. So, a preferred stock works like bonds and notes. Both have pros and cons. It does not necessarily mean that preferred stocks are better than secondary stocks. In fact, dividend in secondary stocks, though sometimes much lower, can be a lot higher depending on the performance.
Investing in stock market is just among the many options to start building passive income. Stock investing could be a good starting point to learn some more. It is basic and it is the most common. Once you gain experience, you can try a more sophisticated one. You may jump to mutual funds afterward or may try to trade currencies or even futures.
The easiest option to start building passive income is through savings. When we save money, we can go to a bank any time we want to deposit. We just open an account and deposit our money. After that, we let our money earn the interest. That’s it. But remember, the easiest it takes, the least we can get.
Therefore, it is better to try what is proven and not what is easy. There is no easy way to success. We have to take everything one at a time. Building passive income is not done overnight. Sometimes, our expectation is not realized, and so we change our plans. But never change the rules of the game. There are the things which must be the first and there are things which must be the last. So, it is not actually important to narrow you’re your options. What is important is to be financially free. How to be financially free is to start building passive income. Now!
About this Author
Michael F. Anyayahan is a freelance forex trader and writer. To learn more about investing, visit: http://www.forexuniverse.yolasite.com
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