What investment vehicle takes advantage of compounded interest?
March 8th, 2010 | by admin |Ava asked:
Am I correct that you do not really compound your money when you buy stocks since your money doesn’t get re-invested yearly? My 10,000 will only increase in value in 10 years if the price of the stock goes up and not because my 10,000 gets compounded annually (unless the company offers dividends which I could re-invest yearly).
Am I correct that you do not really compound your money when you buy stocks since your money doesn’t get re-invested yearly? My 10,000 will only increase in value in 10 years if the price of the stock goes up and not because my 10,000 gets compounded annually (unless the company offers dividends which I could re-invest yearly).
If not stocks, then what other investment vehicles takes advantage of compounded interest? Money market and bonds?
4 Responses to “What investment vehicle takes advantage of compounded interest?”
By Waleed A on Mar 11, 2010 | Reply
It is not really true that your money wont compound. If the company is not paying you dividends it might mean that the company has opportunities to invest in. Which means that there is an opportunity for your money to grow. Most companies use a debt structure so they use the cash from their reserves, shareholder’s equity as well as they borrow money from banks to fund new projects.
Well its a complicated thing but you would wanna know that if the company is in growth mode and a real good company your money can compound much faster than any other investment vehicle.
By Hoags on Mar 12, 2010 | Reply
In the simplest sense, in order to earn compound interest, you’re limited to savings accounts or money market accounts that compound, typically, daily, though some may only offer quarterly compounding (less desirable). If you are in a mutual fund of most any type, both interest (if a bond fund), dividends and capital gains are reinvested, so you receive the benefit of compounding, but this benefit is reported along with the overall principal growth of the investment. If you purchase bonds outright, interest is paid simple, not compounded, such as the example of a standard corporate bond that pays interest semi annually – it would be up to you to reinvest the interest check in more of the same security to achieve a compounding effect. And stocks that pay dividends could similarly have the usually quarterly dividend used to purchase more of the same stock to achieve a kind of compounding of dividend earnings – but stocks are not investments associated with compounding, the main objective is to see the company fare well and the market approve of them by showing more buyers than sellers, thus a price appreciation in that stock. There is more good information on web sites like bankrate.com, where you can shop for interest bearing bank accounts and money market accounts, paying the best rates.
By PracticaL Mentor on Mar 13, 2010 | Reply
Compound interest is specific to money placed into interest bearing instruments such some CDs Saving accounts, and money markets. The so called miracle of compound interest growing the principle is the interest paid over a period which could be daily, weekly, monthly, or yearly is added to the principle and interest is then earned on the new amount. Some CDs do not compound interest and only pay interest on the initial deposit over the entire term of the CD. Stocks do not have a fixed principle and dividends are calculated different than interest so while when you reinvest the dividends you buy more stock it does not guarantee a steady rate of return like compound interest. Bonds often pay a fixed rate of return in interest but the value of the bonds can fluctuate and will not follow the standard compound interest calculation. WIth either stocks or bonds it is possible to end up with less money than initially invested at the end of a period even though all earnings interest and dividends were reinvested. A general rule of thumb for compound interest is the rule of 72. Divide 72 by the fixed interest rate and that is how many years it takes the initial principle to double. For example, If you invest at 9% compound interest the principle will double in 8 years.
By ernesthinton on Mar 16, 2010 | Reply
Corporate Bonds, Savings Bonds, Treasury Notes, Treasury Bills, State of Israel Bonds all utilize Compound interest in order to stay competitive.
I have plenty of the Mosotov Bonds from Israel and the only thing that I don’t like is that they are not to be converted until maturity.
Your theory about stocks is incorrect: Retained earnings is something you should study more and stock valuation. In all probability, you could buy a stock at 10:00 am and at 10:05 it could increase in value, split or declare a dividend…. It could also go belly – up