Is there any relation between compounding in the share market? Like when you invest in a savings account you get a compound unterest, is there anything like that when you buy shares? If not how is buying shares(in the long term) more profitable than a savings account

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Is there any relation between compounding in the share market? Like when you invest in a savings account you get a compound unterest, is there anything like that when you buy shares? If not how is buying shares(in the long term) more profitable than a savings account

In: Economics
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There are stocks that pay dividends (as well as having normal gains). There are brokers that allow you to reinvest the dividends (DRIPs) in the same company. This is essentially the same as compound interest.

This is a grave simplification but here goes:
There are companies which pay dividends (a portion of the company’s profit) to their shareholders and companies which don’t. If you get paid dividends (and reinvest them) you basically have compound interest even if the stock value doesn’t change (which they always do, constantly).
With that being said, if you buy shares you expect them to become more valuable over time as the company becomes more valuable (at a higher rate than the interests of a savings account).

The data generally supports the conclusion that long term stock market returns outperform simple savings interest. The idea of savings account is that the saver gets a safe consistent interest in exchange for the risk of investing in a business. The money in savings accounts are lent to investors who are willing to take the risk of putting it into businesses.

Businesses develop and deploy new technologies and products, invest in production infrastructure, develop markets and invest in efficiencies. A dollar invested in business (in general) would be expected to give better returns over the long run. The capital is used to directly increase societal welfare. There is a compounding effect since each dollar goes on to support more employment of productive capacity (labor, land, equipment, knowledge) and this capacity feeds back into the economy which then has even more capacity to produce and consume.

These are broad brush and long term statements. Individually, people have different risk tolerance and requirements. Not everyone can commit to long term investments, people have some uncertainty in their short term needs and some cannot tolerate fluctuation in gains and losses.

People have this idea that compound interest is some special feature of bank accounts. But really compounding is the natural result of doing things one after the other.

If I buy £100 worth of stock A and it goes up by 10%, then I can sell it for £110. If I then use that to buy £110 of stock B and it goes up by 10% then I can sell it for £121. The capital gains from the first stock is compounded when I invest it in the second!

Or if I run a business with one member of staff who generates £50 000 of profit in year 1, I can use that cash to hire another member of staff and so in year 2 I get £50 000 of profit, allowing me to hire two more staff, and so on. So the growth of the company is compounded.

The key thing is that you have to reinvest any profit, rather than take it out and do something else with it. This is equally true for interest in a bank account as for the examples I gave above. If you get £10 of interest at the end of 2020 but spend it on two beers then it won’t be in your bank account to earn extra interest in 2021.