In light of the cost of living crisis, more people are seeking new ways to diversify their revenue streams. For this reason ‘passive income’ is being spoken about more frequently.
There are several ways to do this. You can take up a side hustle or invest in property, however some people may not be interested in the additional responsibility involved. Another option is to use digital tools to invest in stocks or other asset classes.
Stock investments can result in financial growth and stability, assuming you’re willing to learn how to set this up responsibly. Here’s what you need to know.
Compounding returns
Dividends refer to a sum of money that’s paid (generally annually) by a company to its shareholders. This money comes from their profits. If you receive dividends after buying shares in a company, you may want to reinvest this money to increase your investment value over time.
Meanwhile, compound interest applies to the initial amount, as well as the accumulated interest from previous periods. For this reason, compounding returns means that savings or investments can grow at a quicker rate. When you reinvest dividends, this can increase your pot over time.
Diversification benefits
When you take part in trading or investing, diversification is hugely important. This means you invest across a range of asset classes and industries, which can simultaneously reduce risk or volatility. Many people choose this approach to build steady wealth over time and to help build a solid financial portfolio.
Potential for appreciation
Investing in stocks creates potential for appreciation over time. For this reason, you can use this as a method for increasing wealth passively. Once you put the cogs in motion, you won’t have to intervene, which is a real benefit for those with less spare time.
Accessibility
Fortunately, there are contemporary platforms that can help beginners get started with stock investments without any hassle. You might also find it helpful to get investment advice from a financial advisor so they can give you guidance on the best steps to take. This way, you can also benefit from creating a tailored investment strategy together that considers your risk tolerance and goals. Bear in mind the fact that starting small is a safer bet as there are fewer risks involved.
Tax advantages
Another key benefit of stock investments is that assuming you meet certain conditions on certain types of stock investments, you’ll be exempt from taxation. You’ll also find that there are lower tax rates when you hold stocks for over a year, compared to short-term gains. As long as you’re happy to invest money that you won’t need in the short term, this is a great incentive.
The above information does not constitute any form of advice or recommendation by London Loves Business and is not intended to be relied upon by users in making (or refraining from making) any finance decisions. Appropriate independent advice should be obtained before making any such decision. London Loves Business bears no responsibility for any gains or losses.
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