Compounding interest can be the most powerful thing in the universe that can increase your money fast. When we read about investors or meet someone who invests in the stock market or a fund. They tell us how they can earn compounding returns, then a common question comes to our mind, “How can investors receive compounding returns?” First, You invested your money, and then you get interest on your money. Then you invest money with your earning interest, and your primary goal is to earn interest on interest. This is called compounding return. This will increase your portfolio very fast.
The best example is Warren buffet. You know that Warren Buffett is the most successful investors in the world right now. Do you know how he became rich? So in a word, the answer is from compounding interest.
If you want to know what compounding is, how compounding works, and how can investors receive compounding returns? Then see the explanation given below.
What Is Compounding?
In simple words, compounding means making money from money. This means when you invest money in the stock market, trading or bonds, and any other fund. You can then receive money in the form of interest, profit, or dividend, then reinvest that money in stocks, trades, or any other place where you can make a profit, and so on. – Invest often, and this process is called compounding.
How can investors receive compounding returns on their investments?
Let’s look at an example – You invested $1000 in buying the stock and after that, you get 15% annual dividend (3.75% every quarter) on the stock. The value of your invested share also increases by 15% in a year. Then the total profit earned on the stocks is $300 and the total capital is $1300.
So the second year, you need to reinvest the earned profit in the main portfolio so that it also produces more interest or dividends, which you need to reinvest in the main portfolio to earn more interest or dividends. So, more interest or dividends are received, and the cycle repeats every year.
If you reinvest all of your earned interest at the end of each year, the growth of your investment will look like this Graph, you can see, how can investors receive compounding returns on their investments.
- 1st Year Growth – $1000 + Grow by 30%(Inerest) = $1,300
- 2nd Year Growth – $1300 + Grow by 30%(Inerest) = $1,690
- 3rd Year Growth – $1690 + Grow by 30%(Inerest) = $2,197
- 4th Year Growth – $2197 + Grow by 30%(Inerest) = $2,856
- 5th Year Growth – $2856 + Grow by 30%(Inerest) = $3,712
- 6th Year Growth – $3712 + Grow by 30%(Inerest) = $4,825
- 7th Year Growth – $4825 + Grow by 30%(Inerest) = $6,272
- 8th Year Growth – $6272 + Grow by 30%(Inerest) = $8,153
- 9th Year Growth – $8153 + Grow by 30%(Inerest) = $10,598
- 10th Year Growth – $10598 + Grow by 30%(Inerest) = $13,777
Note at this point, you have almost 14 times your 1st-year investment from the reinvestment of interest earned every year.
It is also a classic example of how can investors receive compounding returns on their investments.
If you want to learn more about investing, then you can read 👇