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How to Maximize Your Stock Market Gains Through Compounding

Sarmaaya Desk
Sarmaaya Content Team

Compound Investment

For long-term gains in the stock market, being patient is as important as starting early. “Be an investor and not a trader”, is what financial experts say when it comes to making money from investments in stocks. 

In our previous article, we have discussed at length why many stock investments fail, one of the key factors being thinking short-term. When buying into stocks, you must always think long-term and not give in to market fluctuations and pressures which are a routine occurrence. 

To achieve that level of investor maturity, you need to have faith in your choice of investment. This is where the importance of financial literacy comes in; when you have begun to invest in individual stocks, you’ve ideally done your market research and know how the company you have invested in has performed historically. 

We have many examples of how without high-paying jobs investors were able to save a decent chunk of their paycheck to invest wisely in stocks to grow their wealth. Some of these investors began with just some thousands of rupees per month and have portfolios worth millions of rupees today.

That’s what compounding does to your investment. If you invest for a long-term, payouts, dividends, and the rise in the share price itself combine to inflate your initial investment into a lucrative portfolio.

How to calculate compound effect of any company in Pakistan Stock Exchange ? To answer this question, we have launched a tool "Return of Investment". This tool helps you to calculate the compound effect of any stock. To understand this tool benefits lets illustrate couple of scenarios how it is being used.

Sometimes people believe that they were at a loss even when they weren’t. When you invest in shares for some specific price and that price comes down after some years then that does not mean that you have suffered a loss. If you are investing in shares, then you need to be familiar with the term compound investment. If you make an investment in shares and the price of those shares come down after some years, you might still be in the profit because a lot of companies pay dividends and bonuses. Suppose you buy 1000 shares of PSO for Rs.300 each in 2013 and later on the price of those shares come down, you might still be in the profit. From the snapshot attached below, we realize that by 2021 those 1000 shares have increased to 2280 shares because of the bonuses provided by PSO. Also the total dividend paid by PSO by 2021 is Rs. 144,282. This means that overall return on investment was Rs. 375,746 for an investment of Rs. 300,000. Even though the current price of the share is Rs.233, which might mislead you into thinking that you suffered a loss but in fact you gained 125% return on your investment which is still a very positive number. 

Fig Ref :  Return on Investment(ROI)

However, this might not always be the case. For instance, the performance of HASCOL was declining which led to a decrease in its share price too. So when investing in shares of a company, you need to look at the company’s financial health and historical data of dividends and payouts. Attached below is the earning per share and the share price history for HASCOL.

 

Fig Ref :  HASCOL

Suppose you buy 1000 shares of HASCOL in 2014 for Rs.90 each. Since 2018, the company has not paid any dividends and the price of the share is around Rs.11. The shares after bonuses increased to 1798. The total dividend paid by the company by the year 2018 was Rs. 40,042 and no dividends were paid after that, thus the total return on investment is actually a loss of Rs. 29,458. For reference, see the snapshot attached below.

Fig Ref Return on Investment(ROI)

 

By making money from the previous year’s profits, the investor’s gains will continue to grow. For the magic of compounding to happen, time matters a lot so the earlier you start to invest, the more your money will have time to grow. 

If you enter the workforce at the age of 22, you have more than 40 years before you retire. You can invest in a stock that has historically performed well and produced a steady return over time. Even if the shares’ performance remains unchanged, you will make considerable gains over the years. 

What’s more interesting in this case is that making that money did not require any stock picking, trading, or even research on individual companies at your end. All you have to do is invest, let the money sit and watch it grow. Some people even reinvest the profits and make their portfolios even stronger.

Track your stock investments 

It’s never too late to start securing your financial future. Warren Buffett, the world’s best investor, made over 99% of his massive fortune after his 50th birthday! You too can try your luck at the stock market today.

But keeping track of your stock investments is crucial for financial success. Sarmaaya.pk’s Android and iOS apps allow you to keep an active track of your assets (i.e.: stocks, mutual fund, Forex and Gold) investments, besides countless other features that help you make informed financial decisions. 

 



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