The first step in learning how to make money online trading or investing is to decide whether you prefer to be a passive investor or an active trader. Passive investors who wish to be hands-off may prefer an automated investing solution provided by robo-advisor firms. Active investors are self-directed and may enjoy higher returns but to achieve these returns may take on higher risks.
A shortcut rule of thumb to decide whether you are an active trader or a passive investor is to ask yourself whether you would be pleased if your portfolio returns mirrored those of the stock market or higher returns sound more attractive to you even if the risks are higher.
Individuals with higher risk tolerances tend to favor more active trading while risk-averse individuals will favor a passive investing approach. Once you know whether active trading or passive investing is a better fit for you, it’s time to figure out how to make money online trading or investing. Let’s start with ways to make money from passive investing.
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Table of Contents
How To Make Money Online Investing: Robo-Advisors
A passive way to make money online investing is to use a robo-advisor that offers an income generating product. Most robo-advisors focus on portfolio growth over the long-term but SigFig allows investors who are looking to generate income invest in its Diversified Income Product that targets a 4% annual yield.
Until 2008, a traditional financial advisor was your go-to resource to manage your money. Since then, robo-advisors have increasingly gained in popularity by offering portfolio management and financial advice services with little human involvement at lower fees. Robo-advisors rely on technology to automatically build portfolios, allocate assets based on your risk tolerance and financial goals, modify your portfolio holdings over time and make portfolio changes to minimize short-term capital gains taxes.
Robo-advisors have different areas of expertise and focus on different aspects of portfolio management. For example, Wealthfront is a leading robo-advisor that specializes in tax-loss harvesting, and claims this feature can boost annual returns by as much as 2%. Personal Capital also manages money and in addition offers all users, not only money management clients, a mobile app that tracks budgeting, spending, and net worth.
A robo-advisor who can help you to make money online investing from your existing nest-egg is SigFig. While most robo-advisors target investors looking to grow their investment portfolios over time, and build portfolios for them based on Modern Portfolio Theory which maximizes returns for risk levels, SigFig goes a step further in serving clients who are income-focused.
SigFig offers a Diversified Income Product that targets annual yields of 4%. It looks to generate yields greater than those available with bonds and CDs, and with lower risk compared to holding stocks. The way SigFig does this is by blending eight different income-generating ETFs that are diversified across many asset classes and geographies.
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>> Learn More About How To Choose The Best Robo-Advisor
How To Make Money Online Trading Using Options
If you already own a stock portfolio but are not generating income from trading options, you can sell call options against your stock holdings. Selling calls against stock owned is a well-known and effective way to use options to make money online trading.
GENERATE INCOME FROM YOUR STOCK PORTFOLIO
If you already own a portfolio of stocks, you can make money online trading options. Options are contracts that come with rights and obligations to buy or sell stock. Perhaps the best option to use to make money when you already own stock is the call option. When you sell a call against your stock holding, you create what is called a Covered Call strategy, which is one of the best options trading strategies.
For each 100 shares of stock you own, you can sell 1 call contract (because 1 option contract generally corresponds to 100 shares of stock) which obligates you to sell the stock at a fixed price. Say you own 100 shares of a stock trading at $50 per share and you set yourself a monthly goal to make money online trading, how do you do it?
If the stock doesn’t pay a dividend, you might assume you will need the stock to rise to make money. But you don’t have to rely on the share price rising to increase your portfolio’s value. Another way to make money without relying on the dividend or needing the stock to rise is to sell a call option.
When you sell 1 call contract against your stock holding, you get paid a fixed amount. For example, you might get paid $1 per contract, and since 1 contract generally corresponds to 100 shares that means you get paid $100.
It might seem like making money this easily is too good to be true. So what’s the catch? When you sell the call option, you agree to a contract which obliges you to sell your stock at a fixed price for a specific time period. For example, if you sold a call at the $55 price level, and the stock rallied up above that level, you would be obliged to sell your stock at $55.
When you choose the covered call options strategy as a way to make money online trading, you will want to select a good options broker who can facilitate fast and accurate order execution. As options brokers compete for business, commissions costs come down over time. A broker now offering zero commissions when options contracts are closed is TastyWorks. TastyWorks was inspired by Tom Sosnoff, who founded thinkorswim, another leading brokerage firm specializing in options and his team.
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via tastyworks secure site
GENERATE INCOME BY SELLING INSURANCE
For most people, insurance is a necessary evil. Car insurance, home insurance, and health insurance all take money out of your pocket. But did you know that you don’t always have to be the insurance buyer? In the stock market, you can sell insurance and get paid for doing so.
The way to sell insurance in the stock market is to sell a put option(s). Investors who own stocks often buy protective put options to limit risk in their portfolios. The put option gives them the right to sell stock at a fixed price for a specific time period. For example, an investor who owns stock at $110 per share may choose to buy a put option at a strike price of $100 which provides the right to sell the stock at $100 per share.
When an investor buys put options, it costs money. A way for you to make money online trading is to sell put options to them. For example, if the investor pays $2 per contract ($200 total) protecting 100 shares of stock then you will get paid that $200 (minus the bid-ask spread and commissions costs).
It might seem like an easy way to make money trading, but there is a catch. The investor who purchased the put option has the right to sell their stock at any time. If the stock drops to $90, they can still sell it for $100. The investor paid $2 per contract for that right when they purchased the put option. As the person who sold the investor the put, you assumed an obligation when you received payment for the option. That obligation is to buy the stock that the investor wishes to sell.
Unlike a car insurance company who may contest the payout terms with you after a car crash, you don’t have the same privilege to contest your obligation if a stock crashes when you sell insurance in the form of put options – you must buy the stock if the share price is lower than the put strike price at the put option’s expiration.
Some of the wealthiest investors in the world, such as Warren Buffett, sell insurance but unless you have the resources to buy the stock if you are obligated to do so, you will want to stick with other less capital intensive trading strategies. For those keen to sell insurance in the form of put options to other investors, tastyworks and OptionsHouse all offer knowledge support staff, low commissions, and fast order execution.
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How To Make Money Online Investing In Dividend Stocks
Over the long term, the compounding effect of reinvested dividends has a greater effect on portfolio valuation than share price gains alone. One of the best ways to make money online is by investing in blue chip dividend paying stocks that you are willing to hold through economic cycles – but consult your financial advisor before taking action to make sure the stocks are suitable for your financial circumstances.
Best-selling author and Professor of Finance at the Wharton School of the University of Pennsylvania, Jeremy Siegel, noted in his book, Stocks For the Long Run, that contrary to popular believe, the majority of gains in the stock market arise from reinvested dividends compounding over time.
When you purchase a dividend paying stock, you can either receive cash distributions or reinvest those dividends to own more stock. Regardless of which you choose, dividends will generally be issued on a quarterly basis. If you choose to receive cash distributions, then the cash balance in your brokerage account will increase by the dividend amount each quarter as long as the company continues to pay dividends.
Purchasing dividend paying stocks is about as close as you can get to making money online investing without having to do much if any work at all. However, you do have to perform some homework initially to find stocks to buy. Blue chip stocks that have weathered the ups and downs of economic cycles generally pay dividends. Well-known companies, such as AT&T, Chevron, Verizon, Wells Fargo and Pfizer, all pay dividends. After you identify dividend paying stocks, you will want to know whether they are good value, and this tool can help you identify how share prices compare to valuation.
An easy way to invest with low fees in a thematic idea, such as dividend paying stocks, is via Motif Investing. Motif is not a standard financial tool or broker or robo-advisor but rather a combination of all three. Motif lets you bundle a customized selection of stocks or ETFs into a single motif, and even get paid a small amount when other customers purchase those motifs.
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