Compounding needs to be more appreciated when growing your wealth in the stock market. As the name suggests, compounding involves reinvestments of your stock market gains back into the stock market. This reinvestment cycle sets off a snowball effect over time. This article will explore the concept of stock market compounding in detail.
Stock Market Investments in India
Who doesn’t dream of growing their wealth by investing in the stock market? While the returns offered by the stock market in India are indeed tempting, what matters the most is the strategy and the approach to making gains in the market. It is important to have a detailed understanding of the concepts of the market before risking your hard-earned money. You could begin by exploring authentic finance blogs and video lectures.
Understanding the Meaning of Compounding
The simple meaning is to make gains on gains. Reinvesting your stock market gains into the market to make future gains can be called compounding. Let us understand compounding with the help of an example. Suppose you invest Rs. 10,000 in a particular stock listed on the National Stock Exchange.
The average annual rate of return of this stock is 15%. In the first year, this stock will give you a return of 1,500. If you expect to earn a return of 1,500 in the next year also, you might be in for a surprise. This stock will give you a return of 1,725 in the second year. The reason is that you gain a 15% return on 1,500 gains made in the first year. Now imagine continuing this trend for an extended period.
There is no better way to grow your wealth than compounding. Not to forget, in case you don’t have one, it is now easier than ever to open a free demat account in India. Nothing should come between you and your first investment in the stock market.
Benefits of Compounding
Let us have a look at the benefits of compounding.
1. Accelerated Wealth Creation
Compounding makes your money work for you. The gains you make on your investments are reinvested in the stock market. Even with a moderate rate of return, your initial investment could become a sizable corpus over a long period.
2. Passive Savings
Earning gains on existing gains is the essence of compounding. In a way, the gains you make in the stock market transform into savings as you do not book profit but reinvest those gains in the market. There are fewer better savings avenues than stock market compounding.
3. Risk Reduction
Compounding helps you mitigate the risks associated with short-term volatility in the market. Holding your position for a relatively longer term is the essential requirement of compounding.
Conclusion
People invest their money in the stock market, expecting to grow their wealth. In this article, we’ve explored the underlying basis of increasing your wealth in the stock market. Compounding makes your wealth grow in the market for a sustained period. We’ve learnt making gains out of existing gains is the essence of compounding.