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Compounding: The secret to making money on the stock market

by , 31 October 2014

If someone asked you to mention a highly successful investor, chances are Warren Buffett would be at the top of your list. Warren Buffett's investments have consistently performed on the stock market for over five decades.

The sad fact is many investors won't see a fraction of his success. And that's because they're not letting their investments work for them.

So how can you make money on the stock market?

Read on to find out…

How you can turn your portfolio’s performance around

Over the years, the majority of investors’ portfolios fail to perform. Compare the performance of the average investor’s portfolio to that of other asset classes, and chances are they’ll come up short. Way short.

Many investors can’t even manage to outperform inflation. That means they’re losing money, Amber Lee Mason in The Crux explains.

When it comes to enviable, consistent performance, Warren Buffett comes out top. Over 50 years, his average annual returns come in just under 20%.

How to get your portfolio making money

The good news is, there’s something you can do to dramatically improve the performance of your portfolio. And that’s to let compounding do its work.

Compounding is simply making money off the money you make. In other words, if you own an asset that pays you an income, you use that income to buy more of that asset.

Over time, you own more of that asset, which in turn earns you even more income.

It’s a snowball effect. By reinvesting, your returns grow exponentially.

Where to look on the stock market for compounding to work at its best

One of the best assets to focus on to let compounding work its magic is dividend paying stocks. You want to find companies that have been increasing their dividend payments for at least ten years.

That shows that these business are maintaining their competitive advantages and are cash generators.

Once you buy stocks like this, any dividend you receive you buy more shares with.

If you’re looking to make money on the stock market over the long-term, investing in top dividend paying companies and reinvesting your dividends is a great way to achieve it. Over time, compounding will make a huge difference to your returns.

So there you have it. Why compounding is the secret to making money on the stock market.

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Compounding: The secret to making money on the stock market
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