Shares are thee part ownership equities or companies. Share are just a peace of whole portion. For example you buy pizza and cut 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 buisness.
What shareholders get in return for their investment? shareholders get profit of the company if company grows year by year. If company failed to deliver profits then share price fall and investor loss 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 means you can participate in decision making. For example you buy Servotech Power Systems common shares from stock market, if company want to appoint new CEO then company take shareholders opinion before assigning new CEO.
Preferred shares don’t have voting rights but have rights to get dividends and interest first than common shareholders. Both Common shares and Preferred shares, anyone can buy it from 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 interest 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 don’t give interest profits it only give interest on principal invested.
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Generally Real Estate, Stocks and Mutual Funds provide compound interest. In real estate, rental income act like compound interest. Mutual Funds gives 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 give you slow growth on your invested amount.
How Compounding Works in Stocks ?
Took the name of stocks and there is no compound interest, it is not possible. Stock have high risk and high returns. Some stocks like Bajaj Finance, Eicher Motors, 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 double but takes long time. but when your stocks cross 100 rupees, now your capital grown to 10 times.
Your invested 10,000 thousand now became one lakhs. Returns saw in percentages terms not in money. Now if stock goes to 1000 rupees then stock go 10 times who bought at 100 rupees, but for you it gaves you 100 times or 100X returns on invested capital, this is how compound interest works in stock market.
