Making money in your sleep is the ultimate dream for hands-off investors. Finding the best sources of passive income may allow you to do just that.
The premise of passive income is attractive because who would not want to sit back and watch their extra cash silently earn more money without doing any additional work? However, generating passive income is easier said than done. It only comes from legitimate opportunities with the potential for substantial returns.
There’s quite a bit you should know before you dive in. If you want to start passive income investing right away, here is a quick guide that can help.
Passive Income - Key Takeaways
- Research your passive income options – You can create passive income by investing in certain financial products, including but not limited to stocks, bonds, currencies, and even cryptos.
- Define your strategy – trading lets you speculate on the price movement; dealing lets you take direct ownership of the assets.
- Take your position – create an account with us to start investing in the financial markets.
What Is Passive Income?
Passive income typically refers to an income stream that is automated. You make an upfront capital investment — often in a stock or mutual fund or other equity-based vehicles — and then receive an ownership stake in that investment, from which you are paid dividends or other types of regular income.
What makes this form of income passive is that you are not directly managing the investment. The goal is to achieve a steady flow of cash without the daily commitment of a full-time job.
With the ease of opening an online investing account, and the historically low costs now associated with buying and selling your issues, creating passive investments in the equities markets is faster and simpler than it has ever been.
Note that passive income does not guarantee immense wealth overnight. Therefore, an individual should not expect to get rich so soon. Also, investments and the income from them can go down as well as up and is not guaranteed at any time as losses can occur also. However, steady, and gainful passive income opportunities can cause a person to amass income over an extended period.
Does passive income really require "no work"?
Passive income does require work. However, much of that work is done at the start. The amount of work involved varies based on the passive income strategy you pursue.
Invest in a reputable dividend stock, and you don't have to do much at all. Just oversee your position, and you might collect a 2% or 3% yield on your investment for many years.
As you pursue higher yields, the amount of work can increase. You could invest in a high-yield income fund that uses leverage and other aggressive tactics to amplify returns, for example. That's a position you'd have to manage closely since it will probably be quite sensitive to market and economic trends.
How to earn passive income through stocks
One of the best high-paying passive income strategies for beginners is investing in the stock market. Ideally, your assortment of stock holdings will generate passive income once you make your purchases and hold the assets for a little while. However, no investment is a guarantee.
Let's explore the most popular passive income options available for retail investors.
1. Dividend stocks
Dividend stocks are one of the simplest ways for investors to create passive income. As public companies generate profits, a portion of those earnings are siphoned off and funnelled back to investors in the form of dividends. Investors can decide to pocket the cash or reinvest the money in additional shares.
Dividend yields can vary significantly from one company to the next, and they can also fluctuate from year to year. Investors unsure about which dividend-paying stocks to choose should stick to the ones that fit the dividend aristocrat label, which means the company has at least a 25-year track record of paying out substantial dividends.
2. Dividend index funds and exchange-traded funds
This is a form of passive investing for those who prefer a more hands-off approach.
Index funds hold a well-rounded selection of many stocks that aim to mirror the performance of a given index, such as the USA500, US Tech 100, or USA30. A dividend index fund will invest in a selection of stocks that pay dividends. Index funds can help balance portfolio risk, as market swings tend to be less volatile across an index compared with individual stocks.
Dividend ETFs offer the diversification benefits of index funds while mimicking the ease with which stocks are traded. To invest in dividend stocks, index funds, ETFs, or other publicly traded assets, you’ll need to open a brokerage account if you don’t already have one.
3. Real estate investment trusts (REITs)
If you want to build passive income from real estate without the fuss and bother (not to mention the hefty down payment) of buying and managing properties yourself, REITs may be the answer.
Similar to mutual funds, REITs are companies that own commercial real estate, such as office buildings, retail spaces, apartments, and hotels. Real estate investment trusts (REITs) tend to pay high dividends, but they vary in complexity and availability. Some are publicly traded on stock exchanges; others are not.
New investors may want to stick to publicly traded REITs, which you can purchase through an online stockbroker. You can also diversify your real estate holdings by investing in ETFs that track multiple REITs.
How to earn passive income through bonds
Rather than buy an ownership stake in a company through stock, bonds are a way for investors to lend money to companies — as well as federal, state and local governments — and collect interest income. Bonds are considered a safer investment than stocks, but also generally earn a lower return on your investment. For example, from 1926 to 2017, government bonds earned a compound annual return of 5.5%. An index of large stocks earned 10.2% during the same period, according to Morningstar research.
Experts suggest investing a portion of your portfolio in bonds because of their lower volatility and relative safety compared to stocks, then having a higher ratio of bonds in your portfolio the closer you are to retirement.
How to earn passive income through forex
A forex interest rate trading strategy can help earn passive income. The carry trade is one strategy that does not rely on market movements.
Carry trading is when you buy and hold a currency that pays a high-interest rate against a currency that has a low-interest rate. Each day a rollover is paid for the interest difference between the two currencies. The advantage of this is that even when your trade is not moving, money is deposited into your account daily. Also, since most forex trades are leveraged, you get paid on the size of your trade, not just the size of your capital.
The downside to the carry trade is that the interest differentials are typically not that much compared to how much risk you are taking. Also, currency pairs that are good for carry trading typically have a strong reaction to any news that presents a risk to the global markets. In other words, if things are good, these pairs will rise and pay. If something goes wrong, sometimes unexpectedly, they will plunge very hard and very fast. If you are overleveraged, you can blow up your account in a blink.
How to earn passive income through crypto
Cryptocurrency is a unique financial instrument that enables anyone with an internet connection to participate in a distributed economy. That includes opportunities to earn passive income. However, there are unique risks associated with investing and earning with cryptocurrency.
The decentralized finance (DeFi) platforms give you the power to earn money like a bank by participating directly in a lending process. Here, users connect their cryptocurrency wallets and commit coins and tokens to a pool with others. That pool is then used to lend to others for interest and fees. The users earn income from the lending process, with the facilitator often taking a portion as a fee. The amount earned from lending crypto depends on three factors: the duration of the loan, the amount of the loan, and the interest rate.
The backbone of cryptocurrency is blockchain, and it takes many computers working in parallel to create a secure, working cryptocurrency. Behind many of the most popular currencies, including Bitcoin and Litecoin, is an algorithm called proof of work (PoW). Under proof of work, computers around the world called miners compete against each other to solve complex equations. The winner can verify the next block of transactions and earns a reward.
Proof of work is not the only way of creating new coins. A large competitor is proof of stake (PoS). Here, users are rewarded for holding currency in a wallet for a period, like a bank interest. Staking cryptocurrency owners can vote on who can act as miners, making the system much more centralized. This is good because it lowers network energy use and can speed up transactions, but it incurs slightly larger security risks in certain scenarios.
What Are the Risks of Passive Income Investing?
Of course, real estate investing also carries risks, just as investing money in any asset class does. When you invest in any passive income asset, you carry the ongoing risk of the loss of your principal. In the case of both a stock or a REIT (Real Estate Investment Trust) investment, this can result when the value of the investment goes down — either due to internal issues with the underlying asset (the company whose shares you have purchased, or the real estate portfolio of the REIT), or due to a general downturn in the market. In either case, the value of your asset can decrease.
Therefore, it is so important that before you make any type of investment you must first do your own research. No investment can guarantee you either a return or even protection of all your principal. But your own due diligence can help you find safer and more lucrative investments for your capital.
Start Passive Income Investment with CAPEX.com
- Choose which type of account you want to use. Your first concern should be your risk appetite and time horizon. If you want to buy and hold passive income investments, open an investing account. If you aim to capitalize on the interest rate differential between two currencies with zero commission and leverage, open a trading account.
- Create an account. Regardless of your chosen account, you must register and complete the KYC process to verify your identity.
- Fund your account with fiat money. Before buying and trading any instruments, you need to fund your exchange account with U.S. dollars, Euros, or other currencies.
- Select your markets. It’s time to decide on your first passive income investment. We strongly recommend that you thoroughly research the best dividend stocks and REITs. Of course, you may choose to invest in ETFs that own baskets of dividend stocks and REITs.
- Place your order. Follow the steps required by the trading platform to submit and complete your order. From market orders to pending orders like Limit and Stop, you have multiple options.
The Bottom Line
Passive income investments can simplify an investor's life. The four options above represent differing levels of diversification and risk. As with any investment, it's important to weigh the anticipated returns associated with passive income opportunities against potential losses.
Before you start passive income investing, you should consider using the educational resources we offer like CAPEX Academy or a demo trading account. CAPEX Academy has lots of free investing courses for you to choose from, and they all tackle a different financial concept or process – like the basics of analyses – to help you to become a better trader or make more informed investment decisions.
Our demo account is a suitable place for you to learn more about leveraged trading, and you’ll be able to get an intimate understanding of how leveraged trading works – as well as what it’s like to trade with leverage – before risking real capital. For this reason, a demo account with us is a great tool for passive income investors who are looking to make a transition to leveraged trading.