Let’s say you invested in shares of a blue-chip company whose stock has experienced significant growth over the past few years. Although you are incredibly bullish about the stock and wish to hang onto it, you can definitely book your profits and exit the investment. Is it possible to make money off of these shares without having to sell them? Let us look at 5 such possibilities:
Keywords: making money from stocks, stock market strategies, passive income dividends, margin trading, loan against shares cash-futures arbitrage, covered calls, stock lending
Meta Description: This article explores various ways to generate income from your stock holdings without selling them, including dividend investing, margin trading, loan against shares, cash-futures arbitrage, covered calls, and stock lending
Many investors believe that the only way to make money in the stock market is by buying low and selling high While this is a common and effective strategy, it’s not the only way to generate returns from your investments There are several methods to make money from stocks without selling them, allowing you to benefit from market fluctuations and generate passive income.
Strategies for Making Money From Stocks Without Selling
1. Dividend Investing
Dividend-paying stocks offer a regular stream of income in the form of dividends, typically distributed quarterly or annually. By investing in companies with a strong track record of dividend payments and growth, you can create a passive income stream that supplements your regular income or contributes to your long-term financial goals.
Example:
Let’s say you invest $10,000 in a company that pays a 4% annual dividend yield. This means you would receive $400 in dividends each year, without having to sell any of your shares.
2. Margin Trading
Margin trading allows you to borrow money from your broker to purchase additional shares, amplifying your potential returns. However, it’s crucial to manage risk carefully, as losses can be magnified with margin trading.
Example:
You own 100 shares of a stock trading at $10 per share. You decide to use margin trading to purchase an additional 100 shares, borrowing $500 from your broker. If the stock price increases to $12 per share, you would have made a profit of $200 on your initial investment and $400 on the margin-purchased shares, for a total profit of $600. However, if the stock price falls to $8 per share, you would incur a loss of $200 on your initial investment and $400 on the margin-purchased shares, for a total loss of $600.
3. Loan Against Shares (LAS)
A loan against shares (LAS) allows you to borrow money using your stock holdings as collateral. This provides access to funds without selling your shares, but it’s important to remember that the lender can sell your shares if you fail to repay the loan.
Example:
You own 1,000 shares of a stock trading at $20 per share. You take out a LAS for $10,000, using your shares as collateral. You use the loan funds for a personal expense. If you repay the loan on time, you retain ownership of your shares. However, if you default on the loan, the lender can sell your shares to recover their funds.
4. Cash-Futures Arbitrage
Cash-futures arbitrage involves simultaneously buying a stock and selling a futures contract on the same stock. This strategy aims to profit from the difference between the cash price and the futures price, which tends to converge over time.
Example:
You buy 100 shares of a stock trading at $100 per share and simultaneously sell a futures contract on the same stock with a futures price of $102 per share. If the futures price converges to the cash price, you would make a profit of $2 per share, or $200 total, without having to sell your shares.
5. Covered Calls
Covered calls involve selling call options on stocks you already own. This strategy generates income from the premium received for selling the options, but it also limits your potential upside if the stock price rises above the strike price of the options.
Example:
You own 100 shares of a stock trading at $100 per share. You sell a call option with a strike price of $105 and a premium of $2 per share. If the stock price remains below $105, you keep the premium and retain ownership of your shares. However, if the stock price rises above $105, the option buyer can exercise their right to purchase your shares at $105, limiting your profit to $5 per share ($105 – $100 + $2 premium).
6. Stock Lending
Stock lending involves loaning your shares to other investors, typically institutional investors, who need to borrow shares for short selling or other purposes. You earn a fee for lending your shares, and you retain ownership of your shares during the lending period.
Example:
You own 100 shares of a stock trading at $100 per share. You lend your shares to an institutional investor for a fee of 1% per annum. If you lend your shares for one year, you would earn $100 in lending fees, without having to sell your shares.
Making money from stocks without selling them requires careful consideration and a thorough understanding of the different strategies available. By exploring options like dividend investing, margin trading, loan against shares, cash-futures arbitrage, covered calls, and stock lending, you can generate income from your stock holdings and potentially enhance your overall investment returns.
Remember to conduct thorough research, understand the risks involved, and choose strategies that align with your investment goals and risk tolerance.
Getting a loan against your shares (LAS)
If trading isn’t your thing, you can also apply for a loan secured by shares (LAS). Typically, banks or NBFCs that can provide you with the loan have a relationship with your broker. The typical haircut is 2050 percent of the market value of the shares. During times when the markets are volatile, the haircut might be higher. You will need to hypothecate the shares to your lender when you accept LAS. There are two risks you need to be conscious of. First off, the financier has the right to sell the shares to recoup the debt if you don’t make your loan payments on time. Consequently, in order to keep your shares, you must make timely loan payments. On the other hand, the financier will request more margin if the share price plummets. In order to cover their risk, the financier may sell your shares if you are unable to provide the additional margin.
Creating cash-futures arbitrage to earn the spread
This is a comparatively low-risk way to profit from your stock. It operates by having you sell comparable futures on the same stock in lieu of your cash holding. For instance, you must sell comparable futures if you own 2,000 shares of Reliance Industries. There is a catch here. This arbitrage can be made in multiples of the lot size. For instance, one lot of RIL consists of 1,000 shares, so you can only engage in cash-futures arbitrage if you own multiples of 1,000 shares. Typically, the cash-futures spread vary between 0. 50% and 0. 80% per month. Even though you still own the shares, the arbitrage is generated when the short futures are rolled over each month and the positive roll spread becomes your profit.
HOW TO MAKE EASY MONEY IN THE STOCK MARKET
FAQ
Can you make money from stocks without selling?
How much money do I need to invest to make $1000 a month?
Can you lose money in stocks if you don’t sell?
How do you turn stocks into money?
How to make money from stocks without selling them?
So, one way to make money from stocks without selling them is just to hold the stocks and collect the dividends, or let them reinvest. Another option is selling your votes. If you’ve held stock for a while, you’ll know that ownership gives you the right to vote on corporate matters of relevance.
How can I Make my stocks work if I’m not actively trading?
Another good strategy that that lets your stocks work for you even when you’re not actively trading is lending your shares. Most of the major brokerage companies, like Schwab or Fidelity, have programs that allow you to lend your shares. The companies need the shares to meet the demand for short selling.
How can I make money in stocks?
If you want to make money in stocks, there is an easier way to do it than buying a bunch of individual stocks. Index funds are made up of dozens or even hundreds of stocks that mirror a market index such as the S&P 500, so you don’t need much knowledge about the individual companies to succeed.
Should you sell a stock if you need cash?
If you need the cash, you have to sell something, so you can’t also stay invested. More to the point: what you’re asking now goes into the decision of whether to sell the stock in the first place. The question you originally posed presumes you’re going to sell the stock, and asks what to do afterward.