Incomes are not created equal. Some, like active income, require the individual to perform tasks to generate it. Think of employees who earn regular wages. Then there’s passive income, which one can make with little to no effort.
Although the latter is an attractive way to earn money, it often involves investments. The ideal portfolio depends on many factors, such as the risk appetite or tolerance of a person.
For those who take a conservative stance, their best choices are certificates of deposit and money market funds, especially since the investment requirements are low. However, the returns are not high too.
Thus, if a person creates high passive income, they need to increase their risk position. But that would also mean that they may have to provide a higher capital.
How can then a small investor maximize the different investment options without really breaking the bank? Here are two ideas:
1. Consider Using ECNs
Forex trading is one of the most lucrative forms of investments—and an enticing one too. It is not as regulated as other markets like stocks, and it operates 24 hours a day as various international markets can open at different times. Most of all, it is a highly active trading market. It trades at over $3 trillion daily.
But forex can be both risky and expensive. To truly maximize their returns, traders have to obtain the ideal leverage ratio. This one can vary according to how much the person is willing to earn—or lose. However, the amount needed is often high.
For example, if the intended leverage ratio of 100:1, for every $1,000 deposit, the trader can put up around $100,000 in their chosen currency pair. Not everyone has that amount of money.
Hence, often, traders have no other option than to borrow from their brokers. Of course, while the returns can be high, the losses can be massive as well.
As an alternative, true ECN brokerage came about. ECN stands for electronic communications network, which provides access to investors to various market participants. The system also creates tighter spreads and allows traders to engage in the market 24 hours a day.
Depending on the chosen brokerage, the minimum amount needed to participate is $1,000. That may be high to some, but the flexibility can make it worth it. Being in forex all day ensures that there is always time to recover from the losses or minimize them. They can also automate the execution of the orders to distance themselves emotionally from each trade and control their spending.
2. Invest in Properties Without Buying One
Unlike other assets, real estate properties like land, buildings, and homes are of a different breed. They often appreciate instead of depreciate. This is especially true for lands since this is a finite resource. Considering the population growth, the demand for it will go up, increasing its price substantially in the future.
The problem is, real estate is pricey. The median home price in the United States is almost $270,000, according to Zillow. In other states, the average cost is even higher. In New York City, a home may already be worth at least $800,000.
The home price usually doesn’t include other associated real estate costs, like closing fees, maintenance, and remodeling. If one decides to buy it using a mortgage, much of the income will only go to amortization.
Those who don’t want the hassle of buying and maintaining a house can place their money on real estate investment trusts (REITs). These funds come from companies that directly own, finance, and operate income-generating properties, which means these are commercial buildings and apartments.
Investors can access them the same way they do stocks, but the entry requirements are low since REITs can function like mutual funds—that is, interested parties can pool their resources to invest.
There are risks involved. For one, investors cannot gain anything from capital appreciation. Moreover, the value can fluctuate many times during a trading session. However, passive income is stable since, according to law, REIT companies need to allocate their 90 percent taxable income as dividends.
Contrary to what many investors believe, they cannot make any income, including passive, without using their own money to participate in the market. That’s why even the most popular portfolios still require careful decision-making.
The good news is that markets these days are more flexible, offering other ways for small traders to be part of the big leaguers. This setup also benefits cautious investors who probably want to test the market or learn the ropes before the full blast.