How to Earn Compound Interest in Stocks | The Best Guide in 2021

Anyone looking to retire young and not wanting to spend all of their years working should look into compound interests in stocks.

compound interest in stocks

Compound Interest in Stocks

Investing in the stock market is often something people are wary of doing.

Often they feel overwhelmed by the prospect and decide that it’s not worth it.

But actually, it can be pretty simple if you know the steps you need to take.

One of the ways you can earn is through a compound interest in stocks.

In today’s guide, we’ll talk about the stock market and how you can earn compound interest in stocks, and how you can make it work for you.

What is the Stock Market?

The stock market is a collection of markets and exchanges where companies gather to buy, sell and trade shares of publicly-held companies.

The stock market is also commonly where one can see the value a company has at any moment.

Many people trade in the stock market as the values of stocks go up and down.

However, many also choose to invest in shares of companies or maybe through mutual funds which is a collection of different stocks. 

compound interest in stocks

Investing in the Stock Market

Due to market price movement, the stock market can be a really good place for anyone to invest in.

There are two primary ways to invest in the stock market: through purchasing stocks of a certain company or through the purchase of mutual funds.

Stock investments can be risky as prices regularly go up and down and so it’s all about making sure to buy when prices are low for certain stocks while you sell when prices are at their highest.

Mutual funds on the other hand are actually a collection of shares from a diverse portfolio of companies.

Mutual funds are generally safer investments as it rarely goes down as it is a collection of companies rather than just one company so the overall value still increases.

These are generally the most common options for investments, but there are many others such as bonds and securities which people can also invest in.

Ask your local broker for available options.

One other way to invest is through a compound interest in stocks.

Let’s review how you can do this and how you can make it work for you.

What is Compound Interest in Stocks?

Compound interest in stocks, or simply compounding, is the process where one uses the earnings from your assets, usually from your interests, and reinvesting the earnings to generate more income over time.

Basically whatever you make, goes back into the investment. 

To put it simply, whenever you invest in a company over a long period of time, and every time your stock earns, you put it back into the investment so that it can continually earn until your investment can gain hundreds or even thousands of pesos. 

Here’s an example.

An investment of $10,000 that is earning at 5% a year will be worth $26,533 in 20 years.

Now, should you increase the amount to 10% the future value will even reach $67,275.

Just by virtue of compounding interest, you can easily grow your investment by up to 6 or 7x more than your original investment.

A quick search online will also allow you to try out some compound interest calculators that can show you how much you can earn from your investments and what the returns are over a period of time. 

Risks to Compounding Interest

compound interest in stocks

Now before you actually invest using compound interest in stocks, you need to understand the risks involved.

Most often the problem is there is a misunderstanding of what that actually means.

Often people mistake compound interest like funds or bank accounts that have a set amount of interest per year.

The mistake here is that they forget is that compounding interest only works if you reinvest something that continues to be at a high value at all times and does not dip.

Your investment will soon begin tanking if you insist on keeping your investment to one market without the idea of diversifying and investing in other things that are yielding high profits. 

Another risk to compounding interest is choosing the wrong investment.

Before you make any investment, you need to make sure that forecasts and market outlook for investment are on the upswing.

This means that the price of stocks or investments will continue to go up.

The wrong investment is to let’s say investing in something that is in a downward trend as you will not be able to see any profits from it so there will be nothing for you to reinvest in and in fact, the reverse will happen.

In this scenario, you will be operating at a loss.

This is certainly something you want to avoid in your investments.

Before putting your money in anything, just make sure to research and read up before you do make any investments and make sure to diversify.

How to Make It Work

One of the first things you need to do is to change your mindset and think of your portfolio of stocks as a single asset.

This change in focus allows you to try to carefully manage all the stocks that you hold so that even if one investment doesn’t do well, you can compensate by putting your money in investments that do.

This way rather than holding on to a few “good” stocks and waiting for them to net a profit after a loss, you can manage multiple stocks and reinvest in the ones that are actually making money and eventually letting go of the losing stocks while you still can.

In this way, regardless of a few losses, you can maximize the potential compound interest in stocks that are actually profiting.

In a way, this is how mutual funds work.

The risk is much less and at the same time, you can be targeted with your approach.

This also means that if any of your stocks tank considerably, you’ll keep afloat as your other stocks are still doing well.

What you want to do is to focus on keeping your accounts in the highs as much as possible.

compound interest in stocks

Final Thoughts

Compound interest in stocks can be confusing at first. But it is really easy once you get a hang of it.

It’s really the approach of more targeted and intentional investing and while there can be hard work, the rewards will be amazing especially in the long run.

Anyone looking to retire young and not wanting to spend all of their years working should look into compound interests in stocks.

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Author: John Benares

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