What is compounding trades?

<p id="isPasted">Forex compounding refers to the reinvestment of monthly or weekly profit in the initial balance.&nbsp;</p><p>This method also entails an increase in risk. Reinvesting your earnings can increase your profits, but it can also result in you losing everything you have.</p><p>Although this strategy may suit some traders, not all have the patience to follow these plans.</p><p>The compounding Forex strategy resembles a snowball effect, meaning it is based on gradual capital growth. A method for converting already-earned money into profits, which allows you to increase your income by changing how you trade. Forex compound trading can result in an increase in your account capital. For this proven method of increasing capital to work, patience, knowledge, and effort are required.</p>

<p><br>Compounding is the most misunderstood term NOT only in Mutual funds but also in stock markets (in general). Especially the term CAGR is highly overhyped for people to invest in mutual funds. To put it in layman terms, if you get 10% of 100rs it becomes 110rs and next time 10% is calculated on 110. In this way, the money keeps getting multiplied. Simple interest is slightly different - if you get 10% of 100rs (like in FDs) for the next 5 years, then every year you will 10rs from your 100rs and interest is not calculated on the interest received. Thats the simplest way to explain it. Now the reason why I said its mostly misunderstood is: this term CAGR is not calculated on a daily basis. It is calculated based on the performance of a mutual fund and the average CAGR is calculated based on the performance of MF or a stock. That does not signify or guarantee any returns in Mutual Funds. This is also calculated similarly in stocks, however people give less importance to CAGR returns of a stock. In MFs, the AMCs usually come up with the excel calculation from CAGR to show up huge returns. Although its not wrong, its NOT accurate too.</p>

<p>Albert Einstein have said, 'Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it.' If you invest a sum of money at 10 per cent for five years, you will multiply your wealth by 1.6 times. If you invest your capital at that rate for 10 times as long (50 years), you will not multiply your wealth by 16 times. You will multiply it by more than 117 times. in stocks if you invested 10000 in Infosys IPO in less than 20 years returns will be 29000000( 2.9 Crore).</p>

<p id="isPasted">A compounding process involves crediting interest both to the principal amount and to interest already paid. Thus, compounding can be viewed as interest on interest, magnifying the returns to interest over time, the so-called "miracle of compounding."</p><p>Banks and financial institutions credit compound interest using annual, monthly, or daily compounding periods. Savings may compound more quickly on investment, or the amount owed may grow on debt even if payments are being made.</p>

<p id="isPasted">By compounding, an investor earns returns on their previous investments. Investing dividends in stocks can earn compound returns.&nbsp;</p><p>Take a look at two scenarios, one where dividends are reinvested and one where they aren't. It is the same amount of money and the same stock in both cases.&nbsp;</p><p>When dividends are reinvested, you will earn more returns if the stock performs well in the future.&nbsp;</p>