Originally Posted by pizzabrat
If making money off the stock market is done by buying stock, waiting for that stock price to rise, and then selling it, how does compound interest come into play? Reinvesting the money gained from the sold stock into a completely different, lower priced stock? The prevailing financial advice I've heard is to invest long-term into stocks, not touching them while they grow througout the years; we're also told to take advantage of compound interest when investing . Constantly selling and reinvesting in different stocks to take advantage of compound interest goes against the first strategy. Is there something I'm missing?
People who hype stocks as the supreme investment vehicle sometimes like to cite the 11% average annual growth in the S&P500 since its inception, and then compute the returns as if it were a deposite account with an 11% interest rate, which isn't really honest or accurate and elides the risk involved.
However, If you were to buy stocks that paid dividends, and then always reinvested the dividends in the same stock, and the price of the stock never changed over time, that would look something like interest. On average, of course, stocks have gone up. And some stocks have had such a consistent gradual rise in spite of all setbacks that they're virtually like money in the bank. Some of these companies have DRIP (divident re-investment programs) where, with your permission, they automatically take your dividend money and buy more stick with it. So if you're the owner of a growing stock then bascially your arrangement looks a lot like compound interest, and potentially a lot better. These won't be high-flying internet stocks, but I trust we all appreciate why those aren't always the way to go.
(Disclaimer, I invest in stocks, I just don't like people who hard-sell them to people who don't yet fully understand investing).