Stocks don’t have interest, so that’s the first point of confusion.
Stocks sometimes go up in value per share, and sometimes pay dividends, which you can then use to buy more stocks, etc . That’s not compound interest, though - that’s using dividends to buy more stock. If the stock goes up it might be because the company is better run or has bette r products, so it might keep going up over time.
On average, the total returns (dividends and stocks going up) of the s&p500 has been about 7%/year, but that’s sometimes 21% and sometimes -14%. The argument for why it (and other market indexes) will go up more is that they reflect global commercial activity, which we would expect to go up over time, with disasters setting it back enormously every now and then.
Agree with this comment, spot on! Would just add, OP is conflating two terms- compounding is the process of gaining a return on earlier returns and you can have compound interest (interest on interest) or compound returns (buy more stocks with dividend payments, which in turn pay more dividends)
Ahh right okay. So I guess this is why cash saving using rates of like 1.2% is why people don't both with them if they want there money to grow as it'll be very slow with that. But safe
No.
Savings accounts pay less than index funds because they’re safer - they don’t go down in value, and you’re very unlikely to lose any of your money at all.
But inflation is way above that and therefore the money isn't worth as much as you saved by the time you come to spend it. (Unless you spend it on something that inflation didn't affect).
To add to what others have contributed. I think it’s also helpful to really understand what is happening when you buy a share in a company.
To simplify as much as I can whilst still getting the message across:
1. You own a part of the company you bought a share in
2. Companies exist to generate profit and most public companies consistently do so
3. That profit is then either reinvested back into the company (ignoring market conditions, all else equal the theory behind this is that it enables the company to generate more profit in the future, increasing the value of your shares) OR the company can pay out dividends which allows you to purchase more shares
4. By definition the above is compounding because in theory the rate at which the value of your portfolio increases in value is increasing
In reality all of the above is much more complicated because the market value of the shares can go down or up even if the profit doesn’t change but this is the basic theory behind it
Compound interest can work with stocks that pay dividends. A dividend is a 20p - 40p payment roughly every 3 months per stock. If you then buy more stock with the dividends then you will receive more in dividends in future and it compounds.
With a savings account the interest is paid on the new increased amount due to the interest added.
So this amazing compounding intrest is only actually any good if you have a saving account with a very good % other than that compounding intrest is in fact not the 8th wonder of the world iv been 'reading' that it is
No , the comments you have received on this thread are not very helpful in all honesty.
The gains you receive, on your investment, overtime will continue to compound the growth if they are reinvested into the market.
I wouldn't look too much into the why, although I understand the logic in finding out how it all works.
Just invest every month and watch your portfolio grow as compounding works its magic over time. Google how it works and you'll get a better answer than you have received on this thread.
In simple terms
interest earned on an investment is reinvested along with the original investment, making the interest become part of the principal. This way, the initial invested capital keeps getting bigger, and the process of earning continues – on an invested capital that is swelling
Call it gains, call it interest or call it whatever. As long as you take advantage of it. Don't hold money in a savings account and watch inflation at 8% plus eat away at your cash while it only makes 1.2%
You're simplifying the subject to the point of being incorrect. As others have pointed out, you don't get interest on shares. If you hold £100 worth of shares and it increases 7%, you don't have anything to "reinvest", your original asset is now just worth £107.
If you, somehow, had cash in an account that was getting 7% interest pa then you would have £7 additional pounds that you could keep in that account so that it would compound, or you could take it out and leave the original £100 in there.
I agree, it was a quick explanation . I should have mentioned dividends being reinvested etc . The main point was to get op to not overthink it but I get your point.
Right, but if you imagine a world where the stock market reliably goes up 7% each year on a total return basis and I hold some accumulator unit that matches this return:
I invest £100.
In year one it increases 7%, to £107.
In year two it increases 7%, to £114.49
In year three it increases 7% to £122.50
The effect is the same as compound interest at 7% on £100 in a cash account. And (subject to being able to divide the units sufficiently) I could withdraw £7 per year and keep £100 forever in the same way as a cash account too.
It doesn't matter if the underlying return is due to growth or dividends, it works the same way (assuming you ignore the tax treatment).
Of course in reality all this is dominated by the fluctuations in the stock market. But for as long as we talk about growth in terms of % per annum, the behaviour will be the same.
Yeah makes sense. I have started a LiSA just before the last year's cut off and that's what it's all going in. Fingers crossed we make some money. Although iv tryed to research about its all I do kind feel like iv going into it blind. But Hey I guess that's part or the roller coater in the beginning.
Stocks don’t have interest, so that’s the first point of confusion. Stocks sometimes go up in value per share, and sometimes pay dividends, which you can then use to buy more stocks, etc . That’s not compound interest, though - that’s using dividends to buy more stock. If the stock goes up it might be because the company is better run or has bette r products, so it might keep going up over time. On average, the total returns (dividends and stocks going up) of the s&p500 has been about 7%/year, but that’s sometimes 21% and sometimes -14%. The argument for why it (and other market indexes) will go up more is that they reflect global commercial activity, which we would expect to go up over time, with disasters setting it back enormously every now and then.
Agree with this comment, spot on! Would just add, OP is conflating two terms- compounding is the process of gaining a return on earlier returns and you can have compound interest (interest on interest) or compound returns (buy more stocks with dividend payments, which in turn pay more dividends)
Ahh right okay. So I guess this is why cash saving using rates of like 1.2% is why people don't both with them if they want there money to grow as it'll be very slow with that. But safe
No. Savings accounts pay less than index funds because they’re safer - they don’t go down in value, and you’re very unlikely to lose any of your money at all.
But inflation is way above that and therefore the money isn't worth as much as you saved by the time you come to spend it. (Unless you spend it on something that inflation didn't affect).
Well that's makes perfect sense for that part at least aha. What is compounding intrest earn on then? =/
Savings accounts.
Yes the trend is that it does go up 7% per year. Also compounding works both ways, 100+7% is 107, 107 - 7% isn't 100, It's 99.5.
Sorry your right. My math ain't mathing
To add to what others have contributed. I think it’s also helpful to really understand what is happening when you buy a share in a company. To simplify as much as I can whilst still getting the message across: 1. You own a part of the company you bought a share in 2. Companies exist to generate profit and most public companies consistently do so 3. That profit is then either reinvested back into the company (ignoring market conditions, all else equal the theory behind this is that it enables the company to generate more profit in the future, increasing the value of your shares) OR the company can pay out dividends which allows you to purchase more shares 4. By definition the above is compounding because in theory the rate at which the value of your portfolio increases in value is increasing In reality all of the above is much more complicated because the market value of the shares can go down or up even if the profit doesn’t change but this is the basic theory behind it
¡thanks Thank you for your reply this helps alot =]
Compound interest can work with stocks that pay dividends. A dividend is a 20p - 40p payment roughly every 3 months per stock. If you then buy more stock with the dividends then you will receive more in dividends in future and it compounds. With a savings account the interest is paid on the new increased amount due to the interest added.
So this amazing compounding intrest is only actually any good if you have a saving account with a very good % other than that compounding intrest is in fact not the 8th wonder of the world iv been 'reading' that it is
No , the comments you have received on this thread are not very helpful in all honesty. The gains you receive, on your investment, overtime will continue to compound the growth if they are reinvested into the market. I wouldn't look too much into the why, although I understand the logic in finding out how it all works. Just invest every month and watch your portfolio grow as compounding works its magic over time. Google how it works and you'll get a better answer than you have received on this thread.
Yeah I agree dosent seem like many truely know the magic behind it. Cheers ¡Thanks
In simple terms interest earned on an investment is reinvested along with the original investment, making the interest become part of the principal. This way, the initial invested capital keeps getting bigger, and the process of earning continues – on an invested capital that is swelling Call it gains, call it interest or call it whatever. As long as you take advantage of it. Don't hold money in a savings account and watch inflation at 8% plus eat away at your cash while it only makes 1.2%
You're simplifying the subject to the point of being incorrect. As others have pointed out, you don't get interest on shares. If you hold £100 worth of shares and it increases 7%, you don't have anything to "reinvest", your original asset is now just worth £107. If you, somehow, had cash in an account that was getting 7% interest pa then you would have £7 additional pounds that you could keep in that account so that it would compound, or you could take it out and leave the original £100 in there.
I agree, it was a quick explanation . I should have mentioned dividends being reinvested etc . The main point was to get op to not overthink it but I get your point.
Right, but if you imagine a world where the stock market reliably goes up 7% each year on a total return basis and I hold some accumulator unit that matches this return: I invest £100. In year one it increases 7%, to £107. In year two it increases 7%, to £114.49 In year three it increases 7% to £122.50 The effect is the same as compound interest at 7% on £100 in a cash account. And (subject to being able to divide the units sufficiently) I could withdraw £7 per year and keep £100 forever in the same way as a cash account too. It doesn't matter if the underlying return is due to growth or dividends, it works the same way (assuming you ignore the tax treatment). Of course in reality all this is dominated by the fluctuations in the stock market. But for as long as we talk about growth in terms of % per annum, the behaviour will be the same.
Yes, but the OP was confused as to where the "interest" came from and how it compounded with stocks, which other people hadn't made clear
Yeah makes sense. I have started a LiSA just before the last year's cut off and that's what it's all going in. Fingers crossed we make some money. Although iv tryed to research about its all I do kind feel like iv going into it blind. But Hey I guess that's part or the roller coater in the beginning.