How can investors receive compounding returns?
A: By investing their earnings back into their original investment
B: By diversifying their investment portfolio
C: By selecting a savings account that has a higher interest rate
D: By transferring their earnings back into high-risk investment
The correct answer is option A.
Investors can receive compounding returns by investing their earnings back into their original investment.
We need to understand the fundamental difference between compounding interest and simple interest. Simple interest is based on basic investment, while compound interest gives extra interest to earn more than the basic investment.
The investors who want to receive compounding returns will not pay a little interest because they aim to get interest on interest. They put their money on work and get compounding interest.
If an investor looking for compounding returns, firstly he has to find an investment vehicle that can offer him a guaranteed compound interest.
Compound returns are when the value of the basic investment grows based on the profits that investment generates, not only on the original principal.
An investor has put $1,000 into an investment with a 10% compound interest per year. At the end of the first year, he will get $1,100. It is the original money plus 10% return of $100 that the investor has put in.
At the end of the second year, he will get $1,210.
His account will grow by more than $100 each year because his annual interest rate was compound.