▌Power of Compounding


Power of Compounding

☼ To understand the power of compounding, these two links of small stories can be visited –

Video 1 – Power of Compounding  for Hindi

Video 2 – Power of Compounding for English

☼ Power of compounding in trading

Let us assume, by using a good system of trading a trader makes 20% profit per month(these type of returns are possible because of positive leverage of paying only margin amount in Future Contract  trading) on his invested amount of rupees 1 lakh for only one year. Can you imagine what will be the return at the end of the year…? This will be 800%, it means ₹ 1 lakh will become ₹ 9 lakh i.e. 9 times. This is the power of compounding.

☼ Annual compound interest formula

The formula for annual compound interest, including principal sum, is:
A = P (1 + r/n) (nt)

Where:

A = the future value of the investment/loan, including interest
P = the principal investment amount (the initial deposit or loan amount)
r = the annual interest rate (decimal)
n = the number of times that interest is compounded per year
t = the number of years the money is invested or borrowed for

Note that this formula gives you the future value of an investment or loan, which is compound interest plus the principal. Should you wish to calculate the compound interest only, you need this:

Total compounded interest = P (1 + r/n) (nt) – P

☼ Let’s look at an example

Compound interest formula (including principal):

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

If an amount of ₹5,000 is deposited into a savings account at an annual interest rate of 5%, compounded monthly, the value of the investment after 10 years can be calculated as follows…

P = 5000. r = 5/100 = 0.05 (decimal). n = 12. t = 10.

If we plug those figures into the formula, we get:

A = 5000 (1 + 0.05 / 12) ^ (12(10)) = 8235.05.

So, the investment balance after 10 years is ₹8,235.05.

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