Quote:
Originally Posted by E150GT
Is it really interest or is it because that value of the stocks that are in your portfolio have gone up? It's not like saving account interest is it? Compound interest is a great thing, just look at the amount of money banks make on a mortgage loan.
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Compounding interest is the idea that not only your principal, but your interest is also earning interest.
Any money that you invest may earn interest, dividends, or capital gains. When you reinvest those earnings, they help generate additional earnings; those additional earnings help generate more earnings, and so on.
Here's an illustration:
If an investment returns 8% per year and returns are reinvested annually:
After one year, your total return will be 8%
After five years, your cumulative total return will be 47%.
After ten years, your cumulative total return will be 116%.