Compound returns are formed when the amount of interest at the end of the investment period is added to the principal amount. The investor should invest funds in accordance with such investment conditions that the amount of interest by the end of the period is added to the principal amount of the investment, increasing it, which generates compound interest.
It stands to mention that ordinary investments are usually made on simple interest terms. This means that the principal amount of the investment is increased by a fixed interest rate for each period. For instance, the investment amount is $1,000, the interest rate is 10%, and the investment period is equal to a year. In this case, by the end of the year, the interest on the principal amount will be $100. According to the terms of a simple interest rate, this interest will be paid to the investor and will not be added to the investment amount. Therefore, over 20 years, the total interest from the investment will amount to $2,000.
Compound returns are formed when the amount of interest at the end of the investment period is added to the principal amount. There is no regular income under such conditions, but the total amount of invested money after several investment periods becomes significantly larger. If the principle of compound interest is applied to all of the above investment conditions, $100 of interest for the first investment period will be added to the principal amount of the investment. Then the amount of investment next year will already be $1,100, and the amount of interest $110, which will also be added to it. In 20 years, only the amount of compound interest in such an investment will amount to over $5,000.
Thus, the investor should add the earned interest to the principal amount of the investment in order to receive compound returns. There are numerous options to invest money under conditions of compound interest in the financial sphere. Investments in some startups promise dividend growth on such terms, as the interest earned on the business is reinvested in the new period. It should also be noted that similar opportunities exist in the stock market.