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He who understands it, earns it … he who doesnt … pays it.
Put simply, compounding means growth on top of growth.
Suppose you have $100 and it grows by 10%.
That means you have a $10 gain, bringing your total to $110.
A similar effect occurs with compound returns, in the context of investment gains from asset price changes.
Suppose you own one share of a stock worth $100.
But compounding is still happening in the sense that the percentage change is based on a growing base number.
This effect is important to conceptualize because stock prices are generally about percentage changes, rather than dollar changes.
However, its important to understand the slight differences between compound interest and compound returns to maximize your finances.
Heres acloser look at compound interestand compound returns.
Compound returns, however, might just be on-paper returns that you dont end up maintaining.
That said,compound return averagesgenerally account for these fluctuations.
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