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What is 'compounding' ?

Discussion in 'General Investing Discussion' started by GG, 12th Sep, 2010.

  1. GG

    GG Active Member

    Joined:
    21st Oct, 2009
    Posts:
    35
    Location:
    Sydney, NSW
    The seemingly accepted definition:
    * Compounding - (Stock market): Definition



    Compounding
    An investment strategy that combines the power of time with accumulating earnings to potentially increase an investor's portfolio value. Each time the investments generate earnings, those earnings are added to the original principal. This new principal balance, in turn, generates additional earnings that are again reinvested.


    If a company has such a good potential to grow that for both the company and the shareholders it makes more sense to invest any earnings in further growth of the company - so that there are no dividends at all

    And that the share price then grows 8% each year
    Isn't this also compound growth that a shareholder benefits from ??
     
  2. Johny_come_lately

    Johny_come_lately Well-Known Member

    Joined:
    1st Jul, 2009
    Posts:
    703
    Location:
    SE Queensland
    Hi,

    Share growth means the shares are more valuable.

    ei. 100 shares = $1000 . 1 share = $10
    share price = $10.30 . value now $1030


    Dividend reinvestment buys more shares.

    ei. 100 shares = $1000 . 1 share = $10
    $30 dividend = + 3 shares . 103 shares value = $1030




    Johny.