Building a second income of £100,000 is no easy task. At least, not for those who don’t already have a seven-figure net worth. But by harnessing the power of compound returns In the stock market, generating a passive income of this size over the long term is more achievable than most think, even starting with just £1,000.

Analyze the numbers

Let’s start by determining exactly how much a portfolio would need to grow to generate a six-figure income. On average, UK dividend stocks offer a yield of 4%. But by being a little more selective, it is possible to push this rate to 5% without taking too many additional risks. Yet even with this slight increase, an investor would still need a portfolio of £2m to hit the £100,000 income target.

So how can investors turn £1,000 into £2 million? One method is to dive into the realm of penny stocks. They are small businesses. However, given enough time, they could become future industry leaders. After all, that’s precisely what’s happening today with some of the world’s biggest companies. Interesting fact: an investment of £1,000 in Apple (NASDAQ:AAPL) when it was a penny stock in 1986, it is now worth over £3.1 million.

All that remains for investors is to find the next Apple. Unfortunately, the vast majority of penny stocks fail to deliver on their promises and investors are often left with nothing. In other words, this is an exceptionally high-risk strategy.

Can we reach £2 million without exorbitant risk?

No investment in sotck exchange is risk-free. However, there are significantly safer ways to invest than penny stocks. And in many cases, these can still prove very lucrative if investors are willing to pump in more money over time.

For example, the FTSE100generated a long-term average return of approximately 8%. However, by selecting high quality individual stocks it is possible to increase this return. Even a 2% increase can make a huge difference in the long run. And investing £500 a month on top of the £1,000 starting capital at 10% can build a £2 million portfolio in around 35 years. Then simply move from growth to dividends to start earning a second income of £100,000.

Of course, this introduces a new challenge. What makes a stock high quality? Let’s zoom in on Apple again. What made it successful?

The company has cultivated enormous pricing power, driven by a cult following among its customers. After all, it’s not uncommon to see huge queues outside its stores every time a new iPhoneis released. Such behavior also demonstrates a reputation for quality among non-Apple customers. And that might just be the convincing factor to convert a new iPhone user.

This is just one of the many competitive advantages Apple has enjoyed over the years. There are obviously other factors to consider. Even Apple today faces risks, such as the brewing trade war between the United States and China, where the company makes most of its products. Still, filtering out companies that don’t have a discernible advantage over their competitors can quickly eliminate many losing investments.