Q. 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?
If not stocks, then what other investment vehicles takes advantage of compounded interest? Money market and bonds?
A. 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.
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