Compound Interest is better than Capital Gains

A capital gain occurs when you sell an asset at a cost that exceeds what you paid for it.  Just as an example, if you bought a house for $150,000 and then ten years later you sold the house for $300,000, you would have made a capital gain.

The same thing applies for shares in the stock market, buying stocks then waiting for them to increase in value before selling them gives you a capital gain on the stocks.

For example, we’ll say you had $20,000.  With that $20,000 you decide to buy an antique and hold on to the antique for a few years to wait for it to increase in value.  You may end up with significant profit after a few years but you also may end up with a capital loss; this means the antique decreased in value and you ended up selling it for less than what you originally paid.

Instead of buying the antique, you could have taken an approach using compound interest.  You could have taken your $20,000 and put it into a term deposit or a similar compounding interest account like a high interest savings account.

In comparison to capital gains, compound interest does have certain advantages; 

– One of those advantages is the low level of risk.

Using a term deposit or high interest savings account to accumulate additional funds has little or no risk.  The interest rate on these accounts doesn’t change so this means the amount of money you earn is stable.  This can be compared to the stock market that can involve a very high risk of losing your money.

Also with the example on antiques, the value has the potential to depreciate in value rather that increase.  The same goes for property investment.  These are high risk investments compared to the use of compound interest.

– Another advantage of compound interest is that additional income is constant

Your money is constantly earning money in a term deposit or high interest bearing account.  You know exactly what you’re earning and how frequently you are earning the additional funds.  This works into a pattern that keeps on increasing the funds within the account.  You’re money is essentially working for you.

In comparison to capital gains, your money is being put to work, for example, if you buy stocks, but the funds earned are not constant.  Stock market prices can fluctuate and decrease within minutes and making additional funds when it comes a time to sell the assets is not a certainty.  Again this uncertainty can be applied to antiques, real estate or other asset that  the buyer sees as maybe increasing in value.

These are the two important factors when comparing compound interest and capital gain. 

It’s difficult to say which of the two is better, but when it comes to the very low level of risk, peace of mind and constant income, compound interest definitely stands out.