Wealth Compounding via Investment in Shares

This is one of the best ways of making money while you remain financially independent. It involves Ideas of the Principle of Compound Interest, where the Interest on your initial investment is added to the principal so that the new Interest also generate its own Interest, thus sparking-up a cascade of Wealth which accumulates over a specified period.

Investment in Shares and Interest Accumulation in Banks are examples of Wealth compounding Process. In the case of Shares, dividends from the previous year can be added to the initial amount invested to make the Principal for the second year. This can be repeated from the third to the final year. But while it is easy to simply calculate the dividends, it becomes a complex Web when they are compiled quarterly (or any other number of times) within a year. Hence the importance of Compound Interest.


What is a compound Interest?

Compound Interest is the sum of Interest accumulated on your initial Investment and the Interest generated from the Interest over a period of time. It is slashed down into a simple mathematical Calculation that brings the entire Interest or dividends into the simple Formula:

A = P[(1+r/n)nt]

Where,

A = The total amount of money at the end of the investment Period,

P = The Principal or the initial amount of money Invested

r = The Ratio or annual nominal Interest Rate represented in Decimal Fraction

n = The number of times the Interest is compounded per year, e.g quarterly.

t = The number of years the money is invested.

For Example, If you intend to invest $2000 into the shares of a company with an Interest rate of 2% (compounded quarterly) over a period of five years, then you should be able to calculate your return on investment by substituting real numbers in the Formula above, so that;

A = 2000[(1+0.02/4)4×5]

A = 2,198.80




Calculation of Compound Investment over a specific period

If you use $10,000 to buy the Shares of a company at an Annual Interest Rate (dividend in Shares) of 20% and lasting for a period of four years, your Total Income after that period will be;

A=10,000+(10,000×20/100)=$12,000.00

At the end of the second year,

A=10,000+(10,000×20/100)+(12,000×20/100)=$14,400.00

The Calculation continues through the Third to the Forth year as represented by the Tabulation below:


Four Years Compound Interest on $10,000 with Annual Interest Rate of 20%

 
Investment in $ 
20% Profit in $
Year1 
10,000.00 
2000.00 
Year2 
12,000.00 
2400.00 
Year3 
14,400.00 
2880.00 
Year4
17,280.00
3456.00
Total
20,736.00
 
Tabular Representation of Compound Interest

Check out these Books on Wealth Creation:

But it becomes very complex when Dividends are shared quarterly so that the calculation can extend into twelve folds. Small wonder, we can use the Compound Interest Formula to derive the same result as evident in:

A=10,000(1+0.2/1)1×4

=$20,736.00

Now that we have considered Wealth compounding in terms of Shares and Dividends, let's take a summary look at Investing in shares.


Meaning of investing in shares

Shares are units ownership of a limited liability company. They are the small units (each of equal amount) into which the capital of a company is divided. The division of the capital of a company into shares enable a variety of persons to take up their own share of the Company each according to his financial ability.

A company raises it's capital either by subscription amongst the friends of the promoters or by public offer. Sometimes, the shares of a company may be issued to persons owed by the company in settlement of such liabilities.

Literally, Shares are stocks that refer to the right of an Investor to partake in the shares of a company's 'Profit After Tax' which is determined by the amount contributed to the company's total shares by such an Investor.

What must be put into consideration before investing in the shares of a Company

• You should Invest in a company you know

• You should always strive to invest early and avoid procrastination

• You should only buy shares you have the Energy and Time to monitor

• You should avoid buying Shares base on past performance of a Company

• You should be ready to be patient to see your Investment work for you

• Look for where to get the best Investment Advice

• Be ready to sell off Bad-Stock and cut losses when necessary


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James Agbogun 5 years ago Author

Thanks Ade! The process of writing Hubs that require Calculations, table and formulars is rather difficult than sentences because you have to invest extra time and care. Also, you must have observed that every knowledge we were able to acquire from different stages of our lives are useful in practical terms.

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