What Is Compounding?

[mathjak107]

Originally Posted by Teak

While you were banging away on drums, I was taking statistics, calculus, and differential equations classes at university. These days I use calculus and statistics nearly every day in my work.

While you were selling light bulbs, I was taking finance classes, and then later, teaching classes such as financial analysis to university students.

Time to be humble, Matthew. You let that "math" part of your "mathjak" nom de guerre fool you into thinking you understood mathematics.

then you should understand how dividends work and are giving you nothing extra and clearly you do not .

i dont care what you think is happening .

also equities compound as well over the years whether you accept the fact or not .each days opening balance is compounded on the previous balance

It isn’t always up but the existing balance is effected by the days action and is cmpounded on

you are just confusing the formula for compound interest with the fact stocks also compound on themselves

case closed

[insulator_king]

Originally Posted by moguldreamer

Compounding of interest is based on a mathematical formula:



which is a simpler version of continuous compounding:



... where the mathematical constant e above, also known as Euler's constant, is the limit of (1 + 1/n)*n as n approaches infinity, and is approximately equal to 2.71828.


There is no compounding when you own equities.

So why do some people talk about compounding when you own equities?

It is fuzzy thinking. They are using the word incorrectly. They lack mathematical rigor either in their thought processes or in their communications -- or both. They are using that word without a mathematical definition. They are using it as a sort-of shorthand for the observation that over long periods of time, businesses prosper and the value of equities appreciates. They are using it in the sense that profits are retained inside the business and reinvested in new technologies, new innovation, new plant & equipment, in inventories, in channels of distribution -- all of which in the future are expected to generate more profits, driving the value of equities up. There is no guarantee, there is no mathematical formula, prices go up and prices go down, but in the long run they go up more than down.

It is used in the same sense that people talk about home price appreciation. Home prices go up, home prices go down, but over long periods of time they tend to go up more than down. There is no guarantee, there is no mathematical formula.

There is no rigorous, analytical thought process involved. It is lazy, imprecise communication.

There is no mathematical compounding in equities, period.

Very well stated.


So many people conflate growth with compounding.

[mathjak107]

growth compounds ..each day your opening balance is acted on percentage wise ….dollars are compounded on over time…