: What's the difference, if any, between stock appreciation and compound interest? I'm trying to estimate what the returns for a 9% stock appreciation and a 6% dividend reinvestment investment portfolio would look like and

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Compounding is just the notion that the current period's growth (or loss) becomes the next period's principal. So, applied to stocks, your beginning value, plus growth (or loss) in value, plus any dividends, becomes the beginning value for the next period. Your value is compounded as you measure the performance of the investment over time. Dividends do not participate in the compounding unless you reinvest them.

Compound interest is just the principle of compounding applied to an amount owed, either by you, or to you. You have a balance with which a certain percentage is calculated each period and is added to the balance. The new balance is used to calculate the next period's interest, which again adds to the balance, etc. Obviously, it's better to be on the receiving end of a compound interest calculation than on the paying end.

Interest bearing investments, like bonds, pay simple interest. Like stock dividends, you would have to invest the interest in something else in order to get a compounding effect.

When using a basic calculator tool for stocks, you would include the expected average annual growth rate plus the expected annual dividend rate as your "interest" rate. For bonds you would use the coupon rate plus the expected rate of return on whatever you put the interest into as the "interest" rate.

Factoring in risk, you would just have to pick a different rate for a simple calculator, or use a more complex tool that allows for more variables over time. Believe it or not, this is where you would start seeing all that calculus homework pay off!

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If you mean, If I invest, say, 00 in a stock that is growing at 5% per year, versus investing 00 in an account that pays compound interest of 5% per year, how does the amount I have after 5 years compare? Then the answer is, They would be exactly the same.

As Kent Anderson says, "compound interest" simply means that as you accumulate interest, that for the next interest cycle, the amount that they pay interest on is based on the previous cycle balance PLUS the interest. For example, suppose you invest 00 at 5% interest compounded annually. After one year you get 5% of 00, or . You now have 50. At the end of the second year, you get 5% of 50 -- not 5% of the original 00 -- or .50, so you now have 02.50. Etc.

Stocks tend to grow in the same way.

But here's the big difference: If you get an interest-bearing account, the bank or investment company guarantees the interest rate. Unless they go bankrupt, you WILL get that percentage interest. But there is absolutely no guarantee when you buy stock. It may go up 5% this year, up 4% next year, and down 3% the year after. The company makes no promises about how much growth the stock will show. It may show a loss. It all depends on how well the company does.