Investing in stocks is a great way to get started with very little money down. It depends on the broker you use and their minimums.
When considering stocks, you'll come across a bunch of different terms such as index funds, exchange traded funds (ETFs), mutual funds, individual stocks, actively managed, growth stocks, and value stocks. It can be overwhelming.
I’m going to give you a very quick rundown of these terms to get you started and then I'll talk about dividends which is where the increasing cashflow part comes in.
An index fund is a specific list of stocks also known as an index.
A good example of an index is the S&P 500 which includes the top 500 publicly traded companies in the USA. The companies within this index will change from time to time as new players emerge or old players lose value. Any index funds that follow this index will make adjustments accordingly but it is otherwise passively managed.
An index fund that follows the S&P 500 will own all the stocks in the correct proportions as outlined in that index.
Index funds generally have low management fees than more actively managed mutual funds.
Exchange Traded Funds (ETF)
ETFs are typically the same as index funds, however, they can be traded live like stocks. What that means is when you buy or sell an ETF, the price at that very moment per share will be what you pay. The price you pay for index funds on the other hand will be the price set at the end of the trading day. For long-term traders, this difference isn't such a big issue.
There can also be some tax advantages as well as the ability to buy fractional shares within ETFs due to the way they are structured and in my research seem to be more of a go-to.
Mutual funds are actively managed and generally try to beat an index or provide a certain return to its shareholders. They will create their own list of publicly traded companies and do a lot more buying and selling than a passively managed fund.
In my experience, mutual funds I have purchased have rarely, if ever, beaten the index they compared themselves to and they have much higher management fees.
Purchasing individual stocks is buying a share of a single publicly traded company.
Funds generally consist of hundreds if not thousands of companies, and the risks are much lower. Whereas if you buy the stock of a single company, the risk is much higher, but so is the reward.
These types of stocks are typically publicly traded companies that are growing fast. These days they are generally associated with tech companies.
Growth stocks typically don't pay dividends and pour that money into growing the company.
Value stocks are typically publicly traded companies that have been around for a long time and are growing in value slowly but are extremely well-known and stable.
Value stocks are typically the type that pays dividends to their shareholders rather than reinvesting into the company.
Ok so let's finally get to the "increase cashflow" part.
Dividends are when a fund or stock pays out a monetary distribution to its shareholders. This might be monthly, quarterly, every 6 months or annually depending on what is decided upon by the manager. This money can be paid in cash or can be used to reinvest in the company or fund by purchasing more shares.
Not all stocks and funds pay out dividends. In some funds, only some of the stocks within it pay dividends. Some funds focus on dividends. Sometimes stocks stop paying dividends.
Dividend paying stocks and funds are generally coming from value stocks so you typically aren't going to see a big capital gain return. It's the ongoing dividend that is focused on.
From my experience, it's been rare to see a company that is growing fast and also paying dividends. In this case, the company and its shareholders are chasing capital gains as opposed to a regular income.
Hopefully, that gives you some better insight into the common terms you'll see.
To increase your cashflow using stocks, focus on purchasing funds that pay out dividends. There are plenty of great resources compared to different funds in your country a simple Google search away.