Finding the best passive stock investing strategy can help you to maximize your returns without as much buying and selling.
It’s common for most financially conscious individuals to want to dip their toes into the stock market.
Using this guide, you can learn more about the three most popular investing strategies to begin making passive income.
Best Passive Stock Investing Strategies You Can Try
Choosing the ideal investing strategy differs from person to person, depending on the results you expect.
There are three popular methods of passive stock investing, known as index funds, DRIPs, and a few others.
Let’s take a look at each in further detail.
Index Funds
Index funds are a popular alternative to actively managed funds, as they require lower expenses for operation.
You’ll receive a constructed portfolio that tracks or matches the financial market index with this type of investment.
Using this method can allow you to have lower profile turnover paired with more diverse market exposure.
IRAs and 401(k) accounts typically contain index funds and have even been notably mentioned by Warren Buffett.
Instead of choosing individual stocks to rely on for your investments, the average investor can use index funds.
Based on the fact that these investments match the return and risk of the market, their long-term performance should exceed individual investments.
How Do Index Funds Work?
The term “indexing” refers to managing your funds massively instead of using a portfolio manager.
You won’t have an individual picking your stocks or managing the timing of the market.
Instead, your portfolio includes selected securities with a pre-designed strategy to know when to buy or sell.
Every financial market that has ever existed has an index and index fund to note.
The most popular in the USA is the S&P 500, followed by the Dow Jones Industrial Average, Nasdaq Composite, and more.
The only time you’re bound to see substantial changes to your investment is if the benchmark indexes fluctuate.
DRIPs
A dividend reinvestment plan or DRIP is handy if you want to grow your portfolio through stock purchases.
When an investor receives cash dividends from a company, they get reinvested into more stock.
Over time, you’ll begin to own a larger stake in the company using small investments over the years.
What Is a Dividend?
As a shareholder of a specific company, you’re likely to receive a dividend.
Typically, dividends come as cash that can be either directly deposited or offered via check.
You can then decide whether to use your dividends elsewhere or reinvest the money using a DRIP.
How Do DRIPs Work?
When managing a DRIP, the shares that you purchase are bought directly through the company.
You’ll find that they’re not likely available on stock exchanges since they come out of the company’s reserve.
Also, DRIPs are unique because they’re not solely available for whole shares, allowing for fractional purchases.
The company whose shares you own will keep track of the ownership percentages for all shareholders.
If you purchase consistent fractional shares, you’ll be able to acquire several whole shares over time.
There are many benefits to investing in DRIPs, especially if you believe in a specific company’s success.
The stocks you purchase will always be based on a dollar-cost averaging schema.
This process ensures that investors never purchase shares at their peak or when they’re low.
Using this method, they’re a far more affordable avenue for getting extra shares into your portfolio.
Another significant benefit of DRIPs is that they don’t have brokerage or commission fees.
Since you’re buying shares directly from the company, you might even be able to acquire discounts.
Overall, they’re one of the more affordable methods for acquiring more shares for your investment portfolio.
Other Funds
There’s no doubt there are multiple other funds to generate income through passive investing.
Let’s explore some alternatives that could pique your interest.
ETFs
Passive exchange trading funds are another financial vessel that you can use to maximize your investment.
ETFs replicate how the equity market performs as well as specific trends of sectors.
With ETF trading, you can buy and sell throughout the day, similar to standard stocks.
All of the components of passive ETFs follow an index or sector without using a fund manager.
You’ll find that it offers far more flexibility than active management, as individual investors apply their own strategies.
If you’re someone who prefers to have the most control over passive investments, ETFs are a great option.
Another significant advantage of this strategy is that ETFs typically have lower turnover fees.
Moving assets out and into your portfolio will be slower than with active management.
Over time, you’ll incur significantly fewer transaction costs, helping to maximize the money in your pockets.
Direct Equity Investments
As an alternative to index funds, equity investments purchase shares in a company through the stock exchange.
Instead of buying directly from the company itself, you’ll use third parties to purchase your stocks.
You earn your income by selling your shares when they’re high, receiving the difference in the sale.
Most investors wouldn’t agree that equity investments are equal to other passive investing strategies.
However, there is a way that you can make them work for your portfolio.
All you have to do is purchase stocks at the same rate as the index, which matches your portfolio to the index over extended periods.
With that said, this process isn’t for the faint of heart or first-time investors because it requires plenty of research.
It’s also not the most convenient strategy, as you’ll need to track weightage changes and index changes yourself.
With the added legwork, it can be challenging to manage, which is why you might want to consider index funds.
Final Thoughts
The best passive stock investing strategy is right around the corner and can help you prepare for your future.
Whether through ETFs, index funds, or direct equity investments, you can make your money work for you. It’s time to transform your savings accounts and protect them against future inflation.
Dividend Investing: The Beginner’s Guide to Create Passive Income and Achieve Financial Freedom with Stocks (Stock Market Investing)