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Stocks 102: Make Compound Interest Work for You

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1.
Compound interest is _______.
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Interest paid on both interest earned and principal. Because of the way compound interest works, your earnings grow faster than they would by simple interest alone.
2.
Reinvesting your dividends helps you compound your earnings because it _______.
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Builds your investment base. The larger your investment base, the more there is to compound.
3.
By investing often while you earn compound interest, you can increase your total return. This is possible because frequent investing increases your _______.
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Principal. Frequent investing adds to the size of your principal, thus magnifying your return.
4.
A tax-sheltered account always protects your investment interest from taxes, even when you withdraw from it.
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False. A tax-sheltered account lets interest grow within your account without taxes until it is withdrawn. Once it is withdrawn, it may be taxed.
5.
The Rule of 72 states that if you divide 72 by a given interest rate, you will learn how many years it will take for an investment to double. How long would it take for an investment with an interest rate of 4% to double?
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18 years. Dividing 72 by 4 gives you 18.