Shares are the part ownership of equities or companies. Share are just a piece of the whole portion. For example, you buy pizza and cut it into four pieces then you give it to shareholders because they invest money into your business and help you to solve your working capital problems, to expand your business.
What shareholders get in return for their investment? Shareholders get a profit from the company if the company grows year by year. If a company fails to deliver profits, then the share price falls, and investors lose money in listed companies.
There are two types of shares. Common shares and Preferred shares are two types in any business. Common shares have voting rights in any company.
Voting rights mean you can participate in decision-making. For example, you buy Servotech Power Systems common shares from the stock market. If the company want to appoint a new CEO, then the company take shareholders’ opinion before assigning a new CEO.
Preferred shares don’t have voting rights but have the right to get dividends and interest before common shareholders. Both Common shares and Preferred shares, anyone can be bought from the stock market with the help of brokers.
What is Compound Interest?
Compound interest is the interest earned on both the initial principal and the accumulated returns from profits. In simpler terms, it’s like earning interest on your interest.
There are two types of interest first is Simple interest and second is Compound interest. Simple interest doesn’t give interest profits; it only gives interest on the principal invested.
Generally, real estate, stocks, silver, gold and Mutual Funds provide compound interest. In real estate, rental income acts like yield. Mutual Funds give you asset appreciation or dividends. If you reinvest dividends, then compound interest increases fast in terms of NAV terms.
When you don’t reinvest dividends, then your Net Asset value gives you slow growth on your invested amount.
| Feature | Simple Interest | Compounding Returns (Stocks) |
| Calculation Base | Principal only | Principal + Accumulated Gains |
| Growth Pattern | Linear (Steady) | Exponential (Snowball Effect) |
| Primary Driver | Fixed Percentage | Price Appreciation + Dividends |
How Compounding Works in Stocks and Mutual Funds?
Took the name of stocks, and there is no compound interest, so it is not possible. Stocks have high risk and high returns. Some stocks like Bajaj Finance, Eicher Motors, and KPI Green Energy give multibagger returns.
For example, you buy 1,000 shares of KPIT Technologies at 10 rupees, 100 % of 10 rupees is 20 rupees means your capital is doubled, but it takes a long time. But when your stocks cross 100 rupees, now your capital has grown to 10 times.
You invested 10,000 thousand now become one lakh. Returns are seen in percentage terms, not in money. Now, if the stock goes to 1000 rupees, then the stock goes 10 times who bought at 100 rupees, but for you, it gives you 100 times or 100X returns on invested capital. This is how compound interest works in the stock market.
How Compounding is Affected by Global Events
Let’s take an example of Sharad Padghan, who is currently pursuing a Diploma in Computer Technology at the Government Polytechnic College of Nashik. He started investing in stocks in 2022, when he got rewarded by Principal Mr Goraksh Garje in his first year of college. He has learned the basics of the stock market from me (Pavan) as well as other notable financial sources from the internet. He invested in KPIT Technologies at a price of 5,00 with amount of one lakh.
He not only learned about college life but also managed other hobbies at the same time. His portfolio is doing well, but suddenly, a global event like the Indian vs Pakistan conflict started at the end of April. Then the stock market suddenly dipped, and his portfolio went from a profit to stood at break even. He believed that this is a part of market cycles and didn’t sell his KPI Tech shares. Then the market recovered, but again, the USA vs Iran war started and caused the market to fall by 12% -16% within one month. He believes in that particular stock and uses the stock average down calculator to calculate his new average price.
| Feature | Long-term Compounding (Sharad’s Approach) | Panic Selling (Short-term Approach) |
| Reaction to Global Events | Views dips as a “buying opportunity” | Sells in fear to “protect” capital |
| Focus | Business fundamentals & CAGR | Daily share price movements |
| Outcome | Potential for 10X – 100X returns | High brokerage costs & missed growth |
Global uncertainties affect the market extremely, but those who didn’t fear this are the real compound creators in the long term, like Warren Buffett.
Journey of Sharad Padghan with 1 Lakhs: Simple vs. Compound Growth over 20 Years
| Year | Simple Growth (15%) | Compound Growth (15%) | The “Wealth Gap” (Difference) |
| 0 | ₹1,00,000 | ₹1,00,000 | ₹0 |
| 1 | ₹1,15,000 | ₹1,15,000 | ₹0 |
| 2 | ₹1,30,000 | ₹1,32,250 | ₹2,250 |
| 3 | ₹1,45,000 | ₹1,52,088 | ₹7,088 |
| 5 | ₹1,75,000 | ₹2,01,136 | ₹26,136 |
| 10 | ₹2,50,000 | ₹4,04,556 | ₹1,54,556 |
| 15 | ₹3,25,000 | ₹8,13,706 | ₹4,88,706 |
| 20 | ₹4,00,000 | ₹16,36,654 | ₹12,36,654 |
If Sharad Padghan kept his money in a bank account for 20 years, then at the end of 20 years, he would get 4 Lakhs without inflation adjusted. But with compounding with 15% Growth rate, he will get 12Lakhs extra than simple interest. This also returns without inflation; if inflation is also adjusted, then the amount is bigger than simple interest.
Main compounding from his example started from year 10, and he suddenly saw the changes in his investment. It doesn’t mean compound interest is easy to earn; many people quit because they didn’t see the returns on investment, and become bored. As humans, we want thrills in life; that’s why trading looks exciting, and investing is boring for most of the investors.
The Power of Dividends: How Dividends SuperBoost the Power of Compounding
| Feature | No Reinvestment | With Dividend Reinvestment |
| Share Count | Stays the same | Increases every year |
| Compounding Speed | Fast (Price only) | Turbocharged (Price + More Shares) |
| Cash Flow | Used for expenses | Used to build a “Wealth Machine” |
Sharad Padghan invest his dividend from KPIT Tech again into that stock rather than spending on buying unwanted things. He increases his chances of compounding at high speed. Without reinvestment, the share of the company remains the same, no increase in quantity, but with dividends, the quantity increases year on year, only if the company pays dividends to shareholders.
Cash flow from dividends, he can invest it into other assets or might spend, but he chooses to stay in stocks, compounding.
How The ‘Wait and See’ Trap Disturbs the Compounding of Investors
Most of the investors who have less capital, they might think we will start investing when we get big capital, but they forget the compounding rule, which is time, not a big amount.
You buy an iPhone, New Clothes, a laptop without thinking about their outcome based on excitement, but when it comes to investment in India, people think “ohh my amount is less and how much I earn on this investment”. These are a few quotes by them. Thinking emotionally affects your compounding if you start late.
Disclaimer:- Equity investments are subject to market risks. The examples of KPIT Technologies and KPI Green are for educational purposes and not direct buy/sell recommendations. Always consult a SEBI-registered financial advisor before investing.”
