Investing & Compounding - for us regulars

J.Pricey

Hello Everybody,

Let me start by saying that I'm new to the MSE world, and I'm still learning the forum etiquette, so please be gentle! I've unrelentingly trawled the forums to find an answer to my questions below, mindful not to ask something that you kind people have already amswered; but I've been unsuccessful this far.

In a nutshell, I'm 28 years old and the penny has just finally dropped! I now acknowledge that my future is important and that I should probably start to be responsible and prepare (kids will do that to you). Amongst this, I have decided I want to put my savings to work. At the moment, the little money I have managed to save is sat in a bank savings account earning a whopping 0.25% interest per year. I'm sure I can do better.

So I've been doing my homework, and shall continue to do so, but I've come unstuck. I keep reading about the magic of compounding. I absolutely get how it works, you earn interest on your "capital" and on your interest for an exponential return. What I don't understand is what specifically earns you interest.

Forgive me I'm sure this is just me being idiotic, but stick with me a second and I'll explain my confusion.

If I want to buy shares in a company, I can find an appropriate platform and make it happen, no problem. So I buy a number of shares, say 100. That number of shares I own never changes without action from me, but the value of them does. So in the case of say Coca Cola, share prices are much the same now as when it first hit the markets. So at 100 shares I'd be no better off over a period of nearly 100 years according to the maths: 100x40 is the same now as it was back then 4000. I know thats wrong, but I need someone to explain how and why.....

Now on that basis, unless I put more money in, im making no gains. For this model to work, I would have to see share prices increase dramatically over that period (doesn't factor compounding) or I should be getting some extra funds come out of that investment each month/quarter/year.

So in my continued research I then stumble across dividend returning shares "as a thing", but no examples or suggestions of how to find them.

So to summarise; can someone please explain to me in the simplest terms how and where do I invest my money to get a monthly or quarterly return that I can continue to reinvest to make use of compounding. Maybe it's not shares at all?!

Please can you give real world examples like
"Set up an account with XX and look for shares called XX" - or whatever it may be.

Please don't tell me to employ someone else to invest my money. I have a financial management company taking care of my pension, but I want to control my other savings. I already know that it's gambling unless you know what you're doing, hence I'm here (everyone starts somewhere).

Please note you can answer/comment/advise with a guilt free conscience, as I'm only looking for a steer so I can continue to do my own homework and research. I just need a little nudge over the first hurdle.

P.s. if you've stuck with me to the end, you're too patient, but thank you!! I look forward to hearing what everyone has to say, and again please be gentle.

Prism

J.Pricey wrote: »

If I want to buy shares in a company, I can find an appropriate platform and make it happen, no problem. So I buy a number of shares, say 100. That number of shares I own never changes without action from me, but the value of them does. So in the case of say Coca Cola, share prices are much the same now as when it first hit the markets. So at 100 shares I'd be no better off over a period of nearly 100 years according to the maths: 100x40 is the same now as it was back then 4000. I know thats wrong, but I need someone to explain how and why.....

Ok to help explain this first can I ask why you think the shares of Coca-Cola have never increased in value? In 1985 they were worth about $1.50 and today its $42 dollars.

J.Pricey

I must be mistaken about that then. When I looked, the IPO value was circa $40 per share and as of today is just a fraction higher.

So yes whilst it may have been up and down over the century buying 100 shares at $40 per share would have cost me $4000. If I now sold those 100 shares at today's value I would have made $4000. By my mindset that is a loss.

Now I get that people play the market and try to buy shares when they are low and sell when they are high, but I'm after a long term investment that compounds interest.

AnotherJoe

You've missed share splits and dividends.

You've read that CC was initially on sale at $40. However the shares have split multiple times since 1919. For example in 1927 everyone who had 1 share was given another, in 1935 you got an extra 3 for everyone you had. So it doubled and quadrupled so youd then have 8 shares for every one you started with. It's done that multiple times since so if you held one share in 1919 youd hold 9,206 now,

But you are looking at a share price of 40 then and 40 now and failing to multiply by 9,206. There's your mistake.
https://www.coca-colacompany.com/investors/stock-history/investors-info-splits#ath

Plus you'd have had dividends paid out. I don't know what the CC dividends is but if its 50c a year paid quarterly so $2 a year, your 1 original share, now 9,206 shares would be paying you more than $18k a year. Not bad for a $40 share that's not moved in price.

Try looking at share graphs that take account of share splits. most do.

If you'd looked ata graph that did you'd see back in 1985 they were $1 or so.but that is back calculated since they've split nearly 50 x since then. If you'd looked at reports of the price in 1985 you'd likely have seen it was about $40. But each one of those shares is now 48 shares. .

Real example I had apple shares at $700. They split 7 for 1 so I ended up with 7x Apple shares at $100 (since a share split doesn't create value). They are now closing on $200, so I've doubled my money since then. If you were usinga bad source of data it would show Apple shares at $700 then and $200 now and figure I'd madea loss.

Moral of the story I should just have bought Coca Cola shares back in the 80's and left it at that !

Prism

J.Pricey wrote: »

I must be mistaken about that then. When I looked, the IPO value was circa $40 per share and as of today is just a fraction higher.

Nope, those shares are much higher than in the 1980's. However lets work with your example and say that you bought the shares in 1998 when they cost $42. 20 years later they are worth about the same. So over that time they have gained however each year those shares paid a dividend so you are still up.

However at the same time you should have bought shares in several other companies or funds that invested in lots of companies. Many of those would have gone up in the last 20 years.

Now I get that people play the market and try to buy shares when they are low and sell when they are high, but I'm after a long term investment that compounds interest.

Most people don't try and time the market. They buy some funds (or shares) and then leave them to grow and compound over the years. Your misunderstanding seems to come from the fact that shares stay the same value. Most do not - they go up.

Mrabs

The point you are trying to get to is dividend reinvestment better known as DRIP .
Each year hopefully company A pays a dividend which you reinvest to buy more shares which obviously increases your share holding .
The next year's dividend is then based on year 1 shares plus those bought through DRIP .
Then year 2 dividend is used to buy more shares which in turn increases your share holding which in turn increases the dividend earned and so it rolls on. Hence dividend paid increases whilst shareholding increases.
Hopefully I have explained it right ..

firestone

part of your question was "what specifically earns you interest"? You would need to look at a fund or share paying div's as some funds are growth focused and so are some company shares with the money reinvested back in the company.
As an example of payments and the growth in price you were worried about i think the HL site is a good one for a place to start i.e if you look up say Next or another well known company you will see info boxes with company details including the yield followed by performance over 5 years followed by the dividends paid.Would guess Coca-Cola may look a bit better then you thought as well;)
But if you want income it may be better to look at a fund or probably an IT

J.Pricey

Big thank you to everyone that has posted thus far, I'm learning alot already. In particular a big thank you to AnotherJoe - you spotted a huge gap in my knowledge and helped fill it with a simple, clear and concise explanation. It's a little frustrating that I've not stumbled across this obvious and simple concept before now.

So really what I'm looking for is share splits and dividends (not interest as such?)....

So where do people go to actually purchase shares that pay dividends?

From what I can tell the likes of Etoro, plus500 etc, won't be suitable. I'd like to buy them myself rather than paying someone else to, if at all possible (tell me if it's not worth the hassle).

Also, are dividends variable, fixed, dependent on what the company offers? How can I find this information? (thanks to Firestone for giving me a head start on this one).

bcfclee27

Great thread.
Quick question on this - I get the Coca Cola example but does the same or similar happen if you invested in something like VLS or Fundsmith for example ?

jamei305

Don't make the mistake of focusing on dividends when what you seem to be after is total return. I don't think you'll mind what proportion of your gains come from dividend payouts and what proportion come from share price growth.

firestone

bcfclee27 wrote: »

Great thread.
Quick question on this - I get the Coca Cola example but does the same or similar happen if you invested in something like VLS or Fundsmith for example ?

assume you mean a split not yield(but yes there is a small yield)I am not an expert but i would think any fund could split if it thinks its price is to high as people prefer to have their £1000 as an example buy say 500 shares rather then maybe 4 shares even if there worth the same.Only this week you had the Shin Nippon IT do just that