There is a way to significantly increase the profitability of your investments - this is a compound interest. Despite the name, there is nothing difficult to understand about it.

Compound interest is an easy way to increase the profitability of your investments. To apply it, you just need to not spend, but re-invest income on securities - for example, dividends on shares or interest on bonds.

You can also apply compound interest when you deposit money in a bank. If the deposit has expired, you simply withdraw the money together with the accrued interest and open a new deposit. But already for a large amount.

Then the interest on the new deposit will be accrued not only on the initial amount, but also on the interest that you received from the first one. That is, interest on interest. It was from this overlay that the name "compound interest" appeared.

## How effective is this?

Imagine a magic chessboard, each cell of which doubles everything that you put on it. If you just fill each cell with dollar coins, then putting $64 on the 64 cells of the board, you will extract 128 coins. In this example, you used the usual simple interest with a yield of 100%.

Compound interest will work if you put $1 in the first cell, and then transfer the resulting $2 to the second cell. Then the second square of the board will turn them into $4. Putting these $4 in the third cell, you will extract $8 from the fourth. If you went through all the cells of this magic board like this, then your wealth would increase to 16 quintillion dollars (a number with 18 zeros). Unfortunately, there is no such board, and the real returns on average are far from doubling. But the principle works effectively.

Let's look at a more realistic example — you have invested $100 in a share with a stable semi-annual dividend yield of 10%. If you apply a simple percentage, then your return will always be 10%. In ten years, you will triple your capital.

But imagine if, after receiving the first dividends, you buy the same shares with them. Now you will receive the next 10% not from $100, but from $110. What will it give? By simple calculations, you can find that you will triple your capital not in ten, but in six years. And in ten years, your capital will grow almost seven times.

Compound interest can be applied not only when receiving interest and dividends. If you earn a profit on the growth of securities quotations, then by investing this profit in whole or in part again in securities, you will be able to increase the profitability of your investments more efficiently and faster.

**Read more:**** Dividends: what is it and how to get them**