"JLP" <AllThingsFinancial[at]hotmail.com> writes:

- quote -

Stock splits do *not* indicate growth of anything in
any useful way. Economically, they are a null event.
If you have a hundred shares of a stock worth $100 each,
it's worth $10,000. If the stock splits 2-1, then you
suddenly have 200 shares worth $50 each. Now, the
market may have some short-term response to the split
(typically it's interpreted as a positive sign), but
economically, it's meaningless.

It's even more meaningless when open-ended mutual funds
split, though that sometimes happens, too.


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herlihyboy wrote:
- quote -

The mutual fund holds shares of stock in various corporations. When
those corporations pay dividends the mutual fund presumably uses that
cash income to buy more stock to boost the value of its portfolio (as
compared to paying out a cash dividend to the mutual fund
shareholders), which is roughly comparable to compounding interest
rather than cashing out interest payments.

If your mutual fund is paying out cash dividends to you, then you are
not compounding unless you set things up to use dividend income to buy
more shares.

Thanks,

Andy

herlihyboy wrote:
- quote -

Good question. It's the same idea, except that the compounding is
"invisible". Let's use an example of a mutual fund that grows 10%
annually, and has no dividends or distributions to make things simple.
You start with a $1000 investment. After the first year, it will be
worth $1000 x 1.1 = $1100. After the second year, it's going to to
grows by 10% based on the value during the second year, so $1100 * 1.1
= $1210. After ten years, it'll be $2594. You sell it for a gain of
$1594, which is a return of 159%. The non-compounded return would have
been 100%.

With stocks, there is divident reinvestment. so you might start with 100
shares of a mutual fund, but if it pays dividends and they are automatically
reinvested into more shares of the fund, you'll end up with more shares of
the fund in the end.


"herlihyboy" <ryan.parmenter[at]gmail.com> wrote in message
news:1107802247.445682.300430[at]o13g2000cwo.googlegroups.com...
- quote -

Well, the compound interest theory really only applies to "fixed
income" type investments. What you get (hopefully) when you buy growth
stocks is compound growth.

If you buy stock in a good company, your money can grow in the
following ways:

Retained earnings - Retained earnings are earnings the company keeps
and puts back into the business. Essentially, this is growth on top of
growth (compounded).

Stock splits - If you buy 100 shares of stock in a company and over the
years it splits 2-1 4 times, you will end up with 1600 shares.

Those are a couple of ways you get "compound growth" from a growth
stock.

Also, you said:

"However, isn't my return when I sell (or start drawing out of it)
simply the difference between the cost of the shares in the fund when I

sell less the cost when I bought?"

Yes, that it is true, but it doesn't tell you what your average annual
rate of return is.

JLP

http://AllThingsFinancial.blogspot.com

I believe I understand how compound interest works where you earn
interest on interest every year. However, I'm not clear on how
compound interest works if I am buying growth stock mutual funds. The
examples of how much wealth can be built due to the beauty of compound
interest always assume a rate of return (let's say on average 10%).

However, isn't my return when I sell (or start drawing out of it)
simply the difference between the cost of the shares in the fund when I
sell less the cost when I bought?

In something like a growth stock mutual fund, how does compound
interest work?

Thanks all,

Ryan