– can some explain how compound works on growth stocks that dont pay dividends.



my smooth brain cannot comprehend. please and thank you

In: Economics

If the stock doesn’t pay dividends then nothing is compounding. The value of the stock just goes up or down. If it goes up from when you bought it, then you will make money if you sell it. If it goes down from when you bought it, then you will lose money if you sell it. A “growth stock” is just a stock of a company that is known for making good money and whose value is projected to increase faster than other companies in the same industry.

There are two underlying drivers of returns with stocks:
1) increases/decreases in sale value (stock goes from $100 —> $150 [50% gain] or from $100 —> $50 [50% loss]
2) cash paid to shareholders (aka ‘dividends’)

If I invest $100 and:
a) the stock grows in value to $150 and I sell
b) I get a $10 dividend and the stock grows in value to $140 and i sell

I get a $50 gain (or 50%) return in either case (before taxes).

So to directly answer your question, you can generate at return buy buying a stock and reselling at a higher price without ever receiving a dividend.

It’s worth noting that that gain in value is a reflection of expected future cash flows to be paid out in dividends, so another way if thinking about this is that the growth in the stock prices is really just paying up for the opportunity to receive more dividends further down the road.

Hope this help. Let me know if I can help clarify this further.