The COVID-19 pandemic affected many industries and individuals. It also highlighted the importance of having a financial backup incase of sudden job loss or salary cuts or enormous medical bills. It has made many realise that creating multiple income streams is the need of the hour. This is where the concept of passive income comes in – any source of income other than your employer. Investing in the stock market is one way to create an additional source of income. So, how to make passive income from the stock market?
- Exchange Traded Funds (ETFs)
Most ETFs check several boxes if you’re looking at how to make passive income in the stock market. They essentially mirror the performance of the underlying index, sector or commodity that they track. As such, an ETF’s very design dictates that it is a passively managed financial product. And if you plan to re-invest any dividend earned through an ETF, you could have a considerable amount in a few years.
- Index funds
When discussing passively managed financial products available in the stock market today, index funds deserve a mention. An index fund invests in the same securities as the benchmark index it tracks, where the portfolio components are of the same weightage as the benchmarked index. As such, it also provides returns that are close to the benchmarked index. Index funds are mutual fund schemes and hence a bit more expensive than ETFs. Index funds can also be sectoral themed.
● Dividend yield stocks
You can create a fairly regular source of passive income by putting together a stock portfolio of companies with a well-established history of dividend payments. However, this option calls for extensive research.
Your stock market picks depend on your risk appetite and the past performance of a company. Similarly, to shortlist quality dividend yield stocks requires the study of factors such as the proportion of earnings a particular company pays out as dividends to shareholders and the ratio of dividend payouts made by a company relative to its stock price.
Getting started with your stock investment plan
You may have often heard or read that it is never too early to start practicing financial discipline. It is undeniable that unless your finances and investments are in order, it is near impossible to hit all milestones you desire in life.
Thus, it makes sense to consider alternate passive sources of income to amplify your net income and improve your financial health.
Navigating through the stock market or making mutual fund investment decisions can be tricky if you are not thoroughly equipped with the workings of the market or do not have the bandwidth to delve deeper into related aspects. It is, therefore, advisable to reach out to a financial expert who can curate bespoke financial plans to suit your risk tolerance, investment goals and horizon.