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It’s not being pedantic. When you talk about the theory of compound interest it’s essentially starting with $100, getting paid interest or a dividend, and then
by tempsy 7y ago
It’s not being pedantic. When you talk about the theory of compound interest it’s essentially starting with $100, getting paid interest or a dividend, and then reinvesting that so now you have $102 that earns a dividend or interest and so on.
Investing in 100 shares of company XYZ that does not pay a dividend, or investing in a company that does pay a dividend but isn’t being reinvested, is not compound interest in the classic sense at all.
- Moodles 7y agoRoughly speaking, if a company doesn’t pay a dividend, it reinvests the profits in itself which compounds its own stock price. You get the benefits of compounding stock prices that way. I think we are arguing over semantics.
- tempsy 7y agoIt’s analogous, depending on the company, but it’s still a misnomer to use compound interest to describe stocks when by definition is only appropriate to describe a loan or deposit (e.g. principal and interest payment)
- deleted 7y ago[deleted]
- PopeDotNinja 7y agoYou're missing a key component of how dividends tend to work. If a stock it trading at $102 and they announce a $2 dividend, the stock almost immediately drops to $2. If you buy/reinvest that $2 back into the stock, effectively nothing has changed.
- loco5niner 7y agoCorrect! Except it drops BY $2 ;-)