Power of Compounding in the Stock Market

What is Compounding?

Compounding is the process by which an investment generates earnings on both its principal and accumulated interest or earnings. In other words, it’s the idea of earning interest on interest. Over time, as interest or earnings are added to the principal amount, the overall investment grows at an increasing rate. The effect of compounding is particularly powerful over long periods because the growth rate accelerates as the investment accumulates more interest or earnings.

For example, if you invest ₹1,000 and earn 5% annual interest, you would earn ₹50 in interest in the first year, bringing the total value of your investment to ₹1,050. If you leave that ₹1,050 invested and continue to earn 5% interest, you would earn ₹52.50 in the second year, bringing the total value of your investment to ₹1,102.50. Over time, this compounding effect can significantly increase the value of your initial investment.

Are you looking for ways to increase your income without requiring much effort? Are you worried about building a financial cushion for retirement and your child’s college tuition? By taking the time to learn how to invest your money wisely and knowing about compounding, you can achieve these goals and more.