Compounding is simply the process in which the earnings from the assets through its interest are reinvested to generate additional income over a period of time. Compound interest has an edge over simple interest as it generates earnings from the principle amount as well as from the accumulated earnings from the preceding periods. in words it might appear to be a simple strategy, but it is difficult to apply in real life. The true power of compounding only works when you start early. No matter how much you invest, consistency is key to experience the magic of compounding. Basically compounding is like the snowball effect you start small but as you invest with consistency, you become big over a period of time.
EXAMPLE:
HOLD YOUR ASSETS:
When you buy the shares of a company, invest with the view that you own a part of the company, not to sell it at a higher price. Stick with the shares of a company over a considerable period of time to reap the highest benefits.
THE SPECIAL CASE OF WIPRO:
Let's assume Rahul had bought Rupees ₹10000 worth of shares(100 shares of ₹100 each) of WIPRO in the year 1980, with a long term perspective, by not selling it for the next 35 to 40 years, by the year 2019(estd.) his portfolio value would have been a staggering ₹556crores! See the split up for yourself in the table below.
Wipro Investment growth
YEAR ACTION NUMBER OF SHARES FACE VALUE
1980 Initial Investment 100 Rs. 100
1981 1:1 Bonus 200 Rs. 100
1985 1:1 Bonus 400 Rs. 100
1986 Stock split to FV Rs.10 4,000 Rs. 10
1987 1:1 Bonus 8,000 Rs. 10
1989 1:1 Bonus 16,000 Rs. 10
1992 1:1 Bonus 32,000 Rs. 10
1995 1:1 Bonus 64,000 Rs. 10
1997 2:1 Bonus 1,92,000 Rs. 10
1999 Stock split to FV Rs.2 9,60,000 Rs. 2
2004 2:1 Bonus 28,80,000 Rs. 2
2005 1:1 Bonus 57,60,000 Rs. 2
2010 2:3 Bonus 96,00,000 Rs. 2
2017 1:1 Bonus 1,92,00,000 Rs. 2
TO KNOW MORE ABOUT COMPOUNDING:
Warren Buffett: The Power of Compound Interest:
How To Earn Compound Interest 📈 3 DIFFERENT WAYS!
How to make 100 crore by investing 10 lakh: Ramesh Damani:
Excellent blog, extremely happy that both of you at such a young age are spreading financial literacy. Keep it up. Regards, naresh kumar bhatt