what is compound interest? how is compound interest related to the time value of money?

First, for example, Suppose “person A” has a principal amount of  Rs 1000. He is doing a fixed deposit for one year with an interest of 10% as a common for easy calculation. After 1 year by the simple interest, it will grow to Rs. 1100. After 2 years the initial amount of    1000  Rs with 10 % interest he will get another 100 so how the total of person A will have 1200 in 2 years. In the  3 years same 10% he will get another 100 and get 1300 Rs.

Likewise in the 5th year with the same 10% interest, person A will have a total of 1500  Rs. So this is completely simple interest. For the principal amount of 1000 Rs will grow 10%, 10% every year. This is simple interest.

Now we will see What e how the compound interest will work. Person B  is investing the same amount of 1000 Rs just like Person A as principal amount with the same interest of 10%. But in this place, this is compound interest.

In the first year, there will be the same growth. So 1000 Rs invested with 10% interest growth. B will get 1100 Rs at the end of the first year. But for the second year, the growth will not start from the initial 1000 Rs but from the first year ending amount 1100 Rs, the interest will be calculated. For the second year, the principal amount will be 1100 Rs with the same 10% interest he will get 1210 Rs. In 3 years he will get 1331 Rs by 10% interest. Likewise overall in 5 years his overall investment will become 1610 s approximately.

Now we will see the difference in 1000 Rs with 10% interest by simple interest and compound interest. The difference between A and B is for A after 5 years is 1500 Rs, for B after 5 years is 1610 Rs. So the difference is 110 Rs extra growth.

Because this is just 1000 Rs we will see it as 110 Rs if it is 10000 Rs or 1 lakhs we will see a fantastic growth. There is another magic inside compounding. Suppose B is investing for 10 years instead of 5 years, in general, we think that it will be 110*2 that is 220 Rs. This is wrong. If we continuously do the compound interest method, in 10 years B will get 2593 Rs. That is in 10 years the interest will be 1593 Rs. So this is compound interest magic. In 5 years he will get 610 Rs approximately but for another 5 years, the growth will be approximately Rs. 1000. This is the process of compounding.

In compound interest for the first four years, the growth will be less after the growth will get increase significantly in year by year. How long term the year you give the growth will be multiplied that is the power of compounding.

Now I think all of us know about simple and compound interest.

Now we will see how this works in the stock market. In the stock market our company that is used in the previous posts we will assume that one share of the company is Rs.

1000. Now person B is buying one share of this company. In one year the company growth is 10%. So his 1000 Rs will become 1100 Rs. In the 2nd year, the company growth is 10% his initial value Rs. 1000 will become Rs. 1210 based on compound interest.

Just like that growth of the company and B is 10% every year.

B will see the difference this is the growth of B in the stock market.

You have to remember two important things. The first one is you have to search for a good company to invest in so that your interest will grow with the company.

The second one is how long you let it grow will give you the true growth of your investment. For example, there is a person C he is investing 1 lakhs with 15% interest in some areas.

Example: In good stock in the stock market for 15% average growth investment. After 28 years the growth of 1 lakhs is 50 lakhs with 15% growth. For this to become 1 crore we will think that we have to wait for another 25 years. This is wrong. Only after 5 years, the amount will become 1 crore that is in another 5 years, 5 lakhs will become 1 crore with same 15%. That is 1 lakh will become 50 lakhs in 25 years and 1 crore in 33 years.

Just like in the stock market, if you invest in the correct stocks in the stock market with the correct growth you will see the growth in the long term.

• I am saying this repeatedly because money is yours. So use it with precaution, understand it well, and do it.
• A real-life example is warren buffet one of the popular and successful stock markets invests his annual growth is only 18% per year. But there are many people, there are doing more than that getting more  returns annually from the stock market.
• For example “Jim Simmons” gets 66% annually from the stock market. But the net worth of warren buffet is very high because of long-term investment. He started so easily and invested for many years.
• For starting investment you need both a Demat account and a Trading account. If you don’t have an account you can create the account by using apps like Angel broking apps.

Once you open the accounts invest in the stocks you know very well and start it slowly.

 Demat Account