I understand how compounding work with cash or money. Suppose, i have principle amount A with annual rate R. I will receive interest I=PR/100 in year and this interest will add on to my principle amount A and become A+I. So, now my priciple amount is larger hence my interest will be higher and so on.
As far as I know some stocks give dividends and some don’t. Now, for stocks without dividends, how does it work. People say just buy some stocks in ETFs and forget about it for years and it will compound. How? As far as I understand, I buy a share of 100 costing 10£ each. So, i spend 100×10£=10000£. Lets say the value of stock goes to 20£ in 10 years. Now, I have total stocks of 100×20£=2000£ so, I got 1000£ extra. So, where is compounding here? Unless, i sell it and buy other stocks. My stocks is not increasing. Only value of my stock is. How is it compounding?
In: 5
People normally think of growth as a percentage, kinda like actual loan interest. If you look at your gains year by year, you can describe any year as A+I. You just aren’t sure what R will be in any given year.
Year one A: $1000
Year two A+I: $1035
Year three A+I: $1100
Year 4: $1140
Year 5: $1300
Etc. I’m trying to show how the return rate changes as a percentage, but the value builds on the previous year even when the rate is slow.
And of course it must be said that stocks can also *lose* value by having a negative return for that period.
Dividends come out of growth so that’s not exactly related to your question. Taking dividends is like cashing out future growth, which is why most brokerage services off DRIP (Dividend Re-Investment Plan).
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