Q. How can investors receive compounding returns?
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- By investing their earnings back into their original investment
- By diversifying their investment portfolio
- By selecting a savings account that has a higher interest rate
- By transferring their earnings back into high-risk investment
Answer: By investing their earnings back into their original investment.
Compounding is the process in which an asset's earnings, from either capital gains or interest, are reinvested to generate additional earnings over time. This growth, calculated using exponential functions, occurs because the investment will generate earnings from both its initial principal and the accumulated earnings from preceding periods.
Compounding refers to the reinvestment of earnings at the same rate of return to constantly grow the principal amount, year after year. It is a technique of making your money work harder for you and is perhaps the most powerful tool that an average investor can use to plan for many of life’s financial goals, including retirement.
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how can investors receive compounding returns everfi 9 quizlet
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