Learn About Compounding - Deepstash
Learn About Compounding

Learn About Compounding

Curated from: investopedia.com

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COMPOUNDING;magic trick for being rich.

COMPOUNDING;magic trick for being rich.

  • Compounding is the process whereby interest is credited to an existing principal amount as well as to interest already paid.
  • Compounding can thus be construed as interest on interest—the effect of which is to magnify returns to interest over time, the so-called "miracle of compounding."
  • When banks or financial institutions credit compound interest, they will use a compounding period such as annual, monthly, or daily.

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COMPOUND INTEREST VS SIMPLE INTEREST.

COMPOUND INTEREST VS SIMPLE INTEREST.

  • Interest is the cost of borrowing money, where the borrower pays a fee to the lender for the loan.
  • Generally, simple interest paid or received over a certain period is a fixed percentage of the principal amount that was borrowed or lent.
  • Compound interest accrues and is added to the accumulated interest of previous periods, so borrowers must pay interest on interest as well as principal.

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PROS  OF COMPOUNDING.

PROS OF COMPOUNDING.

THE PROS;

  • Generate Passive Income.
  • Take Full Advantage of Compounding
  • Invest Once and Profit Twice.
  • Maximize Returns with Dividend Reinvestment.

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CONS OF COMPOUNDING.

CONS OF COMPOUNDING.

  • No benefits for short term.
  • Twice the Taxation.
  • Adverse Effects of Dividend Policy Changes.
  • High Dividend Payout Risks

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