New to investing? Here’s how to use the stock market to try and generate a second income

One of the best ways of earning a second income is by having a business. But that’s often difficult, risky, and a lot of hard work.

Investing in the stock market can be a way of earning extra cash without the effort. And getting started is easier than it might seem.

Businesses

There are three major obstacles to starting a business:

1. Coming up with an idea
2. Finding the cash to finance it
3. Competing against everyone else

The stock market offers a way around all of these. 

It lets investors own established companies with working business models and strong competitive advantages. And they can earn cash for doing so.

Tesco (LSE:TSCO) is a great example. Setting up a shop is the kind of thing that a lot of people can do, but it’s a lot of work.

It involves finding a location, negotiating with suppliers, and attracting customers. And then having to operate the thing.

Even for those who are up for that, Tesco has advantages in just about all of these areas. Beating Tesco at their own game is extremely tough. But the good news is that joining them is an option instead. 

Buying shares

Tesco shares are currently trading at £4.69. So a £1,000 investment buys 213 shares at today’s prices.

Anyone who buys the stock becomes an owner of the business. And – most importantly – they get a share of the company’s profits. Over the last 12 months, Tesco has generated earnings per share of 23p. And it returned 14.25p per share to investors as dividends. 

With 213 shares, that means £30.35. But the 9p or so per share that Tesco hasn’t paid out is arguably even more important. This goes into things like opening new stores and finding ways to keep down prices. In other words, making the company even stronger.

The idea is that this should result in even higher earnings and dividends over the long term. And that’s good for investors.

Risks

Investing always comes with risks. And in the case of Tesco, one thing to be aware of is the firm’s margins. 

For every £1 the firm generates in revenues, around 4p is left after operating costs. That’s not a lot.

If inflation causes costs to increase, Tesco doesn’t have much ability to absorb these. It has to put up prices, or risk losing money.

Increasing prices isn’t straightforward. It’s easy for customers to go somewhere else and they often do when they think there’s better value on offer.

That creates an ongoing challenge. But it’s also an issue for anyone who wants to open a shop independently.

Ultimately, consumers look for value. And tight margins make it extremely hard for anyone to undercut Tesco on price.

Earning income

I think anyone looking to earn a second income should consider the stock market. There are risks, but that’s true of a lot of opportunities. 

Getting started doesn’t take huge amounts of cash. And it’s a lot easier than setting up a business from scratch.

Tesco is just one example that I think is worth looking at more closely. There are plenty of others as well.

The post New to investing? Here’s how to use the stock market to try and generate a second income appeared first on The Motley Fool UK.

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Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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