The decision to start investing shouldn’t be taken lightly (see this article to see if you’re ready) but we wanted to cover one of the most compelling reasons to invest:
We’ve covered different kinds of investments and showed you why it’s important to have a diversified mix of investments in your portfolio. But that just covers risk and investment strategy. The reason investing is attractive to so many people is because of the potential for growth as a result of compounding.
Essentially, compounding is a way for your money to make more money. That’s because you can earn money on both your initial investment and any of the gains you earn on that investment.
Compound growth can be a bit confusing, so let’s look at a concrete example using a simple example. (Bear with us, we’re going to use a bit of math here.)
- Let’s say you have $1,000 invested in a portfolio that earns you 5% interest. In 20 years, that $1,000 turns into $2,000. So you made an extra $1,000! But it took 20 years. Much less exciting.
- Now let’s take the same example, but now, the 5% interest is compounded annually, meaning that your interest gains are reinvested in your account every year.
That $1,000 earns you $50 in interest the first year. The full $1,050 is reinvested to earn $52.50 in interest the second year. Your new total of $1102.50 is reinvested to earn $55.13 in interest the third year, and so on.
Now in 20 years, your initial $1,000 turns into $2,653.30. Compare that to $2,000 without compounding! That’s an extra 65% just because the interest was compounded annually. If the interest is compounded monthly, then that increases your gains even more.
The same concept applies to investing, although in this case, it’s returns* on your investments, not interest, that increase your gains. And rather than on a fixed schedule, your investment gains can be reinvested as they’re earned.
Compounding your earnings with dividends
Investment gains aren’t the only way to take advantage of compounding. Dividends can also add up a lot to a portfolio’s growth.
Dividends are payments that some companies provide as a way to distribute profits to stockholders. Anyone holding a dividend-paying corporation’s stock typically receives dividends on a consistent schedule (such as monthly or quarterly). Not all companies pay dividends and the amount of the dividends do vary. However, they’re still an important consideration when investing.
Your dividends can also be reinvested meaning you’re then able to take advantage of gains on your dividends as well, leading to further growth.
In the long term, this reinvestment cycle can really pay off. Those dividends you’ve reinvested into the stock will fuel more dividend payouts that you can continue to reinvest, helping accelerate gains.
How Qapital helps you take advantage of compound growth
Compounding your gains and earnings and reinvesting dividends can be a complicated manual process. And you may be unsure on how to make compounding work for you. Fortunately, with Qapital Invest, we reinvest funds on your behalf, automatically. So just sit back and see where your investing takes you.
*This scenario considers a positive return. Negative returns are possible and happen throughout an investment’s lifetime.
Qapital, LLC is not a bank; banking services provided by Lincoln Savings Bank, Member FDIC, and other partner banks. Advisory services provided by Qapital Invest, LLC, an SEC-registered investment advisor. The information provided herein is for informational and general educational purposes only and is not investment or financial advice. Past performance is no guarantee of future results. Any historical returns or projections are hypothetical and may not reflect actual future performance. Investments in securities are not FDIC-insured and may lose value. This is not a complete description of Qapital Invest’s investment advisory services. For more details, click here. Brokerage services provided to Qapital Invest clients by Apex Clearing Corporation, an SEC-registered broker-dealer and member FINRA/SIPC. Copyright © 2023 Qapital, LLC – All rights reserved.