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
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.
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