facebookI always heard time in market is important, is there compounding effect in the stock market? - Seedly

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Anonymous

04 Feb 2021

βˆ™

General Investing

I always heard time in market is important, is there compounding effect in the stock market?

For eg, pax A buys a stock at $10 in 2010 and sell at $50 in 2021 vs pax B buys the same quantity of the same stock at $10 in 2018 and sell at $50 in 2021. Are there any difference in their returns?

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Zac

04 Feb 2021

Noob at Idiots Invest

Yes, there is a difference in their returns. Pax B made $40 in 3 years. Pax A made $40 in 11 years. In this scenario, Pax A lugi.

But this doesn't demonstrate compounding effect.

Compounding effect is like, let's say you put $100 into the stock market and it earns you 10%. So after 1 year you have $110. $100 capital, $10 profit. $100 is money you put in, $10 is money you earned.

The next year, your $110 turn into $121. Your original $100 earned another $10. Your profit $10 earned another $1. So now original money = $100. Profit money = $21.

In year 3, your original $100 earn another $10. And your profit $21 earned $2.10. So total profit now is $10 + $21 + $2.10 = $33.10.

Can see the profit growing bigger every year? Within about 7 years or so, your $100 has turned into $200. That's compounding for you.

Compounding is what happens when your profit starts earning interest also, eventually taking a life of its own and growing so big that it starts to match up to your capital.​​​

Royalchem

02 Feb 2021

Project Officer at Security Related

No diff unless got dividend and he reinvested

SG Young Investment

02 Feb 2021

Financial Blogger at SG Young Investment

Yes there is. You can read a blog post I wrote many years back on compounding: https://sgyounginvest...

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