Investing in Philippines: Income classification: why is income from stock investing the secret of the rich

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Thursday, September 2, 2010

Income classification: why is income from stock investing the secret of the rich


I already posted about active and passive income. If you want to know more about active and passive income click here for my post.

Another way to look at income is how to relate the quantity. Income could either be linear, fixed, and exponential.


Linear income is an income where you earn based on the quantity performed. The best example of this type is employment. When you are employed you have a rate. It could be an hourly rate, weekly rate or monthly rate. You are paid based on how many hours you have worked. It could also be in the number of item made or sold. For example a banana cue vendor's earnings is based on the number of banana cue he can sell, a doctor's earnings on how many patients he or she can served, and a sales agent's on the number of sales he or she makes and if the quota is reached.

Linear isn't that bad, the thing is you only earn when you work and make effort so if you got sick, or you are tired or you ran out of  materials to create the thing you are selling you wont earn anything. You are limited to the availability of you time or resources. 


Fixed income on the other hand as the name says is fixed. In a way it is similar to Linear income only that fixed income is always just there. A good example of this is earnings on interest on time deposit that is not compounded. In a time deposit the bank pays you a stated interest rate for a period of time. It is in a way the effect of passage of time. So if you placed a time deposit of Php 250,000.00 that pays you 5%  per annum and the interest is paid quarterly for five years you will get Php 3,125.00 every three months. Now did you noticed what I said....not compounded right?

source: http://fxtraderzone.com/
Exponential income is in a way fixed income with the effect of compounding and timing. If the time deposit above is compounded it will be a different story. Compounding means putting interest on top of the original principal plus the earned interest. This is one form of exponential income. Another form is timing and the best example for this are stock investments. 

Stock prices go up and down...but the secret as always is to buy low and sell high, meaning timing. That is why we have the term bottoming up and taking profits. You buy stocks when they are at their lowest possible value and take profit when they are near their highest value. This is exponential income because your earnings is not dependent on how many hours or units you made, it depends on how much is the value. Of course being exponential does not only mean exponential earnings, it also means exponential loss. That is why timing is a key factor in the stock market trading.

But another way of looking at exponential is how it duplicates itself. The best example of this is a music made by a composer. Remember there is only one music done and yet so many albums sold. It is by duplication that the earnings becomes exponential. Another one is by franchising. A franchise is actually a business modeled by some wise businessmen. In order to earn more the businessman allows others to use the business model he created thus one: the business is expanded and duplicated and two: it reaches more customers. 
source: http://anongbalitangayon.blogspot.com/2009_10_18_archive.html

In the Philippines Tony Tan Caktiong has one of the most successful franchises that the Jollibee brand has expanded worldwide. They have also established and acquired brands to capture certain market and at the same time combining two franchises to have better choices for the customer. Thus in some places Jollibee and Greenwich are juxtaposed.

One of the recent earning streams is by blogging. Blogging actually earns though advertisement which we call online marketing(to know more about online marketing click Jomar Hilario's site). They key factor that can make your blog generate exponential income is readership or what we call traffic. The more readers you have the more advertisers would like their ads to be in our blog. But you may ask how in the world blogging becomes a source of exponential income?







 source: google.com

Well if your blog is heavily trafficked and ads are related to your post even if you stop posting new blogs as long as the words and ideas are still there, your blog stands as a online billboard. People searching the Internet might stumble on your post and learn and is able to see a link that will lead them to a product. Imagine that, after making your blog so famous and so widely read and then you suddenly stop. People will still come to your blog probably by Internet search or referral or what we call a back link. You are not doing anything yet readers still come to you and off course where there is traffic there is earnings...you are just like the music composer who once wrote the song and sold millions of copies of the album.



I know my post kinda diverted from stock investing but at least you know what are these types of income. In stock investing you can compound your earnings by re-investing whatever gains you have from your profit taking. You can also duplicate your money by investing in several good stocks. Just keep the cycle going. Buy low, take profits when prices are high, reinvest your earnings, and invest to more good stocks.


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