It is common to think that an investor can earn money solely through investments in stocks. In reality, existing stocks can be sources of regular income, as well. Rather than leaving stocks idle, one can earn extra income through different avenues and increase the effectiveness of the entire portfolio. Here are some ways to earn money using existing stocks.
SLBM (Stock Lending and Borrowing)
The Securities Lending and Borrowing Mechanism (SLBM) enables retail investors to lend their idle stock holdings for a specific period to borrowers, usually short sellers and arbitrageurs, and receive a lending fee in return.
When stock is borrowed, it will be temporarily moved from the lender’s possession to that of the borrower, for purposes like short selling or meeting expiry requirements, etc. This involves the temporary transfer, not the permanent sale, of the shares.
In SLBM, the lender remains the beneficial owner and still receives all dividends and corporate actions while earning the lending fee as income from the borrower. The lenders receive their shares back upon the expiry of the agreed tenure.
Dividend income from quality companies
The easiest method of earning returns from the existing stock investments is through dividends. Many companies share a part of their profits with their investors in the form of dividends, which are often distributed every quarter or yearly.
Dividend-paying stocks, especially in sectors like FMCG, IT, and banking, offer a steady income stream to investors without selling their holdings. Thus, dividends make up an important part of the overall total return of an investor’s investment, along with capital appreciation.
Compounding through dividend reinvestment
The dividend reinvestment strategy enables individuals to purchase more stocks by using cash dividends generated from their present stock ownership rather than taking the money out. As a result, the investor is able to accumulate more shares without injecting any new funds. Investors can use a market screener to find dividend-paying stocks.
With increasing shareholding, there will be an increase in dividend income since payments of dividends depend on the number of shares held. This will ultimately lead to a cumulative effect whereby the assets as well as the income possibilities increase over time.
This strategy does not offer much cash flow in the short run, but its strength lies in increasing portfolio gains through the buildup of investments in dividend-producing companies.
Liquidity access through stock pledging
Margin pledge is a strategy for an active trader whose funds are trapped in long-term investments. With a margin pledge, they can pledge their existing stock holdings and obtain a collateral margin at a small deduction known as a haircut, which usually ranges from 10% to 20%, depending upon the volatility of the stock.
The traders can utilise the margin obtained from margin pleading to trade in the Futures & Options (F&O) segment or for Intraday trading, thus increasing their liquidity without selling their existing holdings. As the underlying shares stay in the portfolio, investors keep enjoying price movements and other activities from their holdings, within the bounds of pledge terms.
Conclusion
Most investors are unaware that there are also ways through which they can make additional gains from existing stock holdings, even without selling them. Investors can employ strategies like securities lending and borrowing mechanisms, dividends, and margin pledging to make their idle holdings work for them and generate additional income besides capital appreciation.
Each of these ways has its own risks and benefits, and doesn’t cater to all. Thus, before employing these ways, investors should conduct in-depth research and evaluate whether these strategies align with investment objectives, and then make the decisions.
Santosh Kumar is a Professional SEO and Blogger, With the help of this blog he is trying to share top 10 lists, facts, entertainment news from India and all around the world.
