How Does Compounding Ensure Better Returns On Investments?
Are you a trader or an investor? Have you been on the receiving end for such questions? Often, individuals categorize a novice into either of the two sections, i.e., investor or trader. Short-term buying and selling of investments are labeled as a trader, while long-term holding of investments is termed an investor. The long unsettled- debate centers on, ‘Which side of the financial market guarantees more returns to an individual?’ However, the most successful investors of all time have favored and placed reliance on long-term investments, such as shares, sip, etc.
The urge for instant gratification compels individuals to cave in all their investments and enjoy short profits. Consequently, the same story is read with different words by those who withdraw their sip investment in the early years out of lack of patience. Fear and patience have been the biggest elements that stop individuals from forecasting the big picture unroll after years of compounding. The long-term game accumulates profits at a slower pace but guarantees them while building wealth for an individual that lasts for decades and generations.
The Power Of Compounding
Every time you check your online mutual funds, you may notice that the profits do not sum much; however, the moment you glance over your investments after years, the numbers would add up to an extraordinary amount. The segment of mutual funds runs on a similar concept and has been the talk of every social gathering of investors who play in the long game. Below are a few pointers that revolve around the long-term benefits of investing in the financial markets.
- Dividends & Bonus
The dividends offered by most companies are satisfactory and close to average for many traders; however, when these dividends are compiled together over the years, they add up to huge profits earned as a royalty. Investors enjoy a huge chunk of money for holding the same stock over the years while also being entitled to have their investment considered as a capital gain. Similarly, a selected range of stocks offers bonus shares and stock splits, which ultimately lowers the average buying price of an investor and presents them with more profits in the long run than any regular short-term trade in a specific stock.
- The Reward Of Patience & Time
Often, traders spend their time mulling and worrying over the scenario where the financial markets would crumble and eat away all their profits. Ultimately, their investment decisions are always influenced by fear, and they spend most of their daily lives out of concern by frequently checking their trades. On the other hand, investors who embrace the element of patience are the least likely to be affected by market volatility as they are in for the long game. Consequently, having time as their ally, they make the most of their financial dreams.
Compounding gives you a fair chance to bolster your investments even better. At times, the market’s volatility may present an opportunity to buy certain stocks at one of their lowest prices. Long-term investors can leverage the opportunity and find even a lower holding average by reinvesting their dividends and the profits earned into the same stock.
It may become difficult to draw the big picture, but compounding and adapting yourself to the long game makes the chances of making good profits more achievable. An investor can choose reputed and fundamentally strong companies and relish the benefits of compounding years later.