Compounding is one of the best and most efficient ways to yield returns in an investment. In the simplest sense, compounding is a series of rate of returns of a certain investment. It is normally being computed in a specific period of time such as monthly, quarterly, semi annually, and normally, annually. However, compounding can either be positive or negative. Because it either makes an investment grow or lose faster than normal interest rates, it may either work very well or bad for an investor.
Expounding further, compounding works this way. For example, a $1,000 investment is groomed to grow at 10% every year. After the first year, the investment grows by $100 which becomes the capital for the second year. Entering the second year, the investment is now $1,100 covering both the original capital and the gains during the first year. On the second year, the $1,100 investment will grow $110 rather than $100. Summing it up, the interest earned during the previous term becomes a part of the capital for the next term making it grow faster.
Many people know the basics of compounding but most people get into the dilemma of looking for ways on how to efficiently make their money grow in a compounding way. Below is a list of some ways of how to invest and make your money grow in a compounding way.
1.) Stocks. There are several ways on how to invest in stocks. Two of the most popular are first, through a stock broker, or second, through a mutual fund company. Investing in stocks is one of the most profitable investments there is but it comes with a price. Investing in stocks isn’t that easy. It requires knowledge, guts, and being updated with the different things that affect a certain company and the market as a whole. In order to eliminate such responsibility, mutual funds are good alternative. Mutual funds have professional fund managers that handle investments on behalf of the investors. Investing in stocks can give very good returns if done long term. In five years, some companies can grow to as much as 1,000% if picked well while several mutual fund companies do around 100% to 200% returns in five years. A conservative growth of 12% every year is given as a default rate of return for mutual funds but some companies can do better than that. Imagine putting $1,000 in a mutual fund company that gives 12% every year. After five years your $1,000 can grow to a little over $1,700 in five years. It may not sound much but compare it to banks.
2.) Savings programs. Savings programs come in different forms these days but by looking closely at all of them, they all work the same, they give you a good value for your money. Some health care companies put savings programs in their products while some life and non life insurance companies do the same. It works both ways for the client and the company. On the company side, they can ask for higher premiums from the policy holders while on the client side, they can get more worth for their money by getting more by paying more. Normally, companies give a rate of return by more or less 10% per annum and hold it for at least 10 years. This gives the company some time to make such investment grow and make some money while on the client side, it makes your investment grow to a significant amount after a decade, a win-win situation so to speak.
3.) Cooperatives. Cooperatives are gaining popularity especially in rural areas where financial institutions rarely tap. Cooperatives work in a different way than investing firms in a way that they provide financial assistance in the form of loans. Cooperatives also give out dividends. How does compounding work in cooperatives? By putting the dividends that you earned back to the cooperative, it give you more amount to grow and the bigger the amount that you have in a certain cooperative, the greater the rate of return. Cooperatives normally give an average of 10% to 15% dividends while some may go to as high as 20% or even 25%.
Those three are just a few of the many ways on how to compound your money in investing. But keep in mind that by investing, there are risks involved. Normally, the higher the potential returns, the higher the risk involved. That’s just how it goes in the market and in the investing world and the only way to minimize such risk and earning more is by acquiring knowledge on how to do such things. Investments are very profitable but if done recklessly, it may result to huge losses.