Stock market is a place where buying and selling of shares happens in specific time. Some people like to buy shares and sell at same day while some are like to hold for long term both types of people are present in stock market. Why some people hold shares for long term ? Because power of compounding works in long term. Compound interest work in stock market. Lets understand in details
What is Compounding ?
If you invest your money into banks Fixed Deposits then banks gives you 5% returns per annum means if you invest 100,000 in FD then per year you got 5000 then after second year you also got same returns of 5000 because banks give us simple interest on our money.
Simple interest is simply interest on your invested amount and never increases with mature returns.Whereas compound interest first give returns on invested amount then after second year it gives returns on invested amount but also on earned interest. In simple terms compound interest gives returns on returns.
How Compounding Works In Shares ?
For Example you invest 10,000 into stocks. Stocks usually gaves higher returns than other asset classes, after one year stock gave 20% returns means you got 2,000 and total amount is 12,000 then after second your stock give 20% then your returns become 2,400.you see the difference between simple and compound interest.
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Supposed you buy titan at 3 rupees and invest one lakh into it. after some time stock becomes doubles means stock price at 6 your invested amount become two lakh. Someone invested one lakh into titan at 6 rupees then stock double at 12 but you invested at 3 your amount becomes four lakhs thats the difference.
One major difference in stock market is dividend income. Dividend is the profits distribute by the company to its stakeholders. Dividend amount increases by time passes.