Your “Right” To Generate A Second Income Starts Here
After the pain and suffering caused by the global financial crisis, not to mention the losses many investors experienced, a lot of people still feel disillusioned with Wall Street.
Maybe you’re one of them. I don’t blame you if that’s the case. After all, the crisis we experienced wasn’t a market anomaly. It was a house of cards built by large banks, risky traders, and short-sighted government policies that came crashing down on our heads.
But if you’re one of the many investors who has used this painful experience as an excuse to sit out of the market, my advice to you is stop. It’s one of the worst mistakes you could make with your portfolio. In fact, I would argue that if the events of the financial crisis taught us anything, it’s how incredibly important it is for individual investors to take charge of their own portfolios.
One of those ways is to exercise the certain rights and freedoms that go along with stock ownership. Unfortunately, most shareholders rarely exercise their full rights.
As one of the fathers of value investing, Benjamin Graham (also Warren Buffett’s mentor), wrote in his classic book, Security Analysis:
It is a notorious fact, however, that the typical American stockholder is the most docile and apathetic animal in captivity. He does what the board of directors tell him to do and rarely thinks of asserting his individual rights as owner of the business and employer of its paid officers. The result is that the effective control of many, perhaps most, large American corporations is exercised not by those who, together, own a majority of the stock but by a small group known as “the management.”
You see, as shareholders of publicly-traded companies, most people don’t realize they are entitled to a say in things like company mergers and dividend policy. And if you own enough shares, you can even fire management or take over the company, driving change yourself.
That is what wealthy “activist investor” Carl Icahn is famous for doing.
But your voting rights are just the first of many rights you have as a shareholder. Some companies offer additional privileges that are not well-advertised. But while these little perks are nice to have, there’s another important shareholder “right” you’re entitled to that’s far more important than any of these: a second income.
Money Left On The Table
As a shareholder, you’re entitled to earn extra income from the stocks you already own. And no, I’m not talking about dividends, either. The truth is, you can earn income from most stocks on the market, regardless of the company’s dividend policy. All you have to do is own at least 100 shares and sell a covered call option.
First, let me say that it’s incredibly simple to do this. You don’t need to be a sophisticated trader. And it’s not overly risky, either. Frankly, other than simply not knowing it exists, I don’t know why more investors don’t take advantage of it. It’s practically money left on the table.
To understand what I mean, let’s look at an example.
Let’s say I own 100 shares of Apple (Nasdaq: AAPL). At the time I’m writing this, shares trade for about $121.
Now, let’s say I offer to sell my shares for $140 within the next four weeks. That would give me a nice little profit, but there’s a catch… The person on the other side of this agreement has to pay me upfront (say, $130) for the right to buy my shares in the future.
It’s that simple.
In the following four weeks, if Apple doesn’t rise to $140, I don’t have to sell my shares. I simply keep my upfront payment of $130, walk away and repeat this process again and again as much as I want.
On the other hand, if Apple does go above $140, the investor takes me up on my offer and buys my shares. That’s okay, too. I just booked a modest gain plus the $130 upfront payment. (The math works out to about 16.7% in this case.)
You Can Make Trades Like This, Too
There are thousands of stocks listed on the NYSE and Nasdaq stock exchanges that let you take advantage of this shareholder right. I like to think of covered calls as a way of collecting “bonus” dividends from my shares.
Or put another way, if you do it monthly, it’s like collecting renting out stocks that I already own — much like a rental home.
I’ve devoted my career to demystifying options for regular individual investors. And covered calls are just one of the safe, simple ways investors can earn more income for their portfolio. In fact, I have an entire report devoted to showing regular investors how they can earn thousands of dollars per month in “bonus dividends”.