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

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.​​​

No diff unless got dividend and he reinvested