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
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.
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