At some point in your life, you have probably heard one of your friends or colleagues retell the story of how they hit the jackpot on stock “XYZ” or how they made £20,000 in one day on an awesome spread bet that went their way. Both examples highlight how easy and accessible it is for the general public to dabble on the stock market. However, the reality is most retail traders lose money. It doesn’t help that we are constantly being bombarded with advertisements from brokers of all sizes to part with our hard earned cash and trade on their financial products available (which makes sense given they make more money the more trades you execute). This process is all the more enticing given the “teaser” offers that are available to newcomers. It is therefore all the more important not to believe in the hype, and to do your own research and understand what you are getting yourselves into, whether it is through buying stocks on the FTSE100 or going short on Crude oil using a spread bet or CFD (contract for difference).
Despite the risks involved, investing in the financial markets has a crucial part to play in achieving financial independence. It goes without saying that having an interest and fundamental understanding of the financial markets is essential in building that healthy retirement nest egg and generating a relatively sizeable amount of passive income. As an illustration of the herculean task we all face, let’s imagine we set ourselves the target of earning £2,000 a month in passive income. How large does our portfolio have to be in order to achieve this? If we assume a dividend yield of 4% per annum and ignoring any potential appreciation of the assets held, then we would need a portfolio of £600,000:
I should caveat that my example above does not take into account of any potential appreciation (and depreciation) of the value of the portfolio itself, or of the potential tax implications and trading costs involved. If your portfolio is held in an ISA (individual savings account) then rest assured any capital gains are exempt from capital gains tax (CGT) and dividends are not caught under the new dividend tax regime.
It’s almost incredulous to imagine a normal working professional being able to save up anywhere near this amount in a reasonable period of time. I hope my example illustrates the difficulties that lie ahead, but it was by no means meant to discourage you (or even myself!)