facebookCan someone explain the compounding effect of a DLC with an example? What does it mean for the performance to be reset and why does this compound the effect? - Seedly

Anonymous

16 May 2020

General Investing

Can someone explain the compounding effect of a DLC with an example? What does it mean for the performance to be reset and why does this compound the effect?

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Let's assume stock X has 1% growth for 5 days with initial price of $100:

Day0: 100.00

Day1: 101.00

Day2: 102.01

Day3: 103.03

Day4: 104.06

Day5: 105.10// (5.10%)

We have a 7x DLC of the stock X worth $2:

Day0: 2.00

Day1: 2.14

Day2: 2.29

Day3: 2.45

Day4: 2.62

Day5: 2.81// (40.5%)

While the stock price increases 1% daily, the 7xDLC moves (1%x 7) daily. Above is an example of positive compounding. Do note that your losses can also compound similarly.

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