Compound interest eli5:
Hello,
So I am little confused, I know that compound interests is interests on interests. But how you achieve it? Say that I invest 100 dollars in a Roth IRA in a eft fund that pays 2% dividends, after a year it grows to 102 dollars(plus appreciation with is like 7%) so like after a year I “have” around 110 dollars and as years go on this cycle repeats? Is this what compounding is in ROTH Ira?
In: Economics
So ETFs don’t pay interest, they pay dividends. Those are different. Dividends can change from year to year, even quarter to quarter, based on things like companies’ performance. And they’re not set as a percentage of share price. A company may pay 25 cents/share, and pay the same whether their stock is at $20 or $50. And ETF’s values rise and fall on daily basis as the underlying shares do.
Compound interest is relevant to things like savings accounts where interest is more defined, paid on the principal amount and the principal only grows as interest comes in.
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