Greetings, dear readers and subscribers! There is an old parable about how the inventor of the game of chess, Sessa, showed his creation to the ruler. He was greatly impressed and asked what award Sessa would like to receive.

The sage modestly replied that he did not need much: 1 grain of wheat for the first square of the chessboard, 2 grains for the second, four for the third, and so on. The ruler laughed and said: “Have it your way!”

As it turned out later, there was not enough grain in the whole world to fulfill this request. There is no miracle here, and in business this phenomenon is known as reinvestment.

The Glossary defines reinvestment as “an additional investment of one’s own or foreign capital into the economy in the form of increasing previously invested investments at the expense of income or profits received from them.”

Speaking in simple words, reinvestment is the investment of profits received from previously made investments, and profits can have a variety of origins.

For example, Robert Kiyosaki has repeatedly cited the example of reinvestment in real estate.

Suppose the owner of the property rents it out. It is quite possible (and even most likely) that rental payments will not be enough to purchase another property on credit.

But what prevents you from renting it out too? Moreover, if market conditions are favorable, a loan secured by existing real estate can be taken out on significantly more favorable terms. With a well-thought-out strategy, the total cash flow can increase with each new object.

However, do not forget that investing in real estate is profitable in a growing market, whereas in a falling one.

By the way one more interesting example works of compound interest can be found in the article "".

Rich Pinocchio

Let us now turn to a closer example for us with bank deposits. There are two types of interest on deposits: simple and complex.

Simple interest is calculated at the end of the year. If, for example, the deposit amount is 10 thousand rubles, and the deposit rate is 10%, then at the end of the year 1,000 rubles will be credited and the total amount will be equal to 11,000 rubles.

Compound interest is calculated monthly, weekly and even daily. In this case, the annual rate is divided by the number of periods of capitalization or reinvestment, and with each subsequent capitalization, the amount available at that moment increases according to the resulting value.

In our example, instead of 11,000 rubles, we get 11,052. Isn’t the difference obvious? Then let's see what we will have in 5 years. In the case of simple interest, the initial 10 thousand rubles will turn into 16,105 rubles. And in the case of a complex procedure – 16,486 rubles.

Since reinvestment leads to an increase in profits according to the law of geometric progression, the higher the return on an investment, the greater will be the advantage of reinvesting profits over withdrawing them.

This advantage is clearly manifested, for example, in the retail trade of popular goods on trays and in mobile pavilions. Steady demand, high trade margins and minimal costs per retail location make it possible to quickly accelerate working capital.

A classic example of earning “interest on interest” is trading in the Forex market. Let’s assume that the trading profitability is 10% per month, of which half is withdrawn, and the other half continues to work on the account. Let's look at the annual dynamics of deposit growth:

If in the first month the profit was $50, then in the last month it was 85.5%. This is an illustration of how reinvestment allows you to increase your earnings. The other side of the coin is that in high-risk markets, the possible loss increases to the same extent. Therefore, we need a middle ground between the complete withdrawal of profits and its complete reinvestment.

It is a common practice in joint-stock companies that profits at the end of the year are used not for the payment of dividends, but for reinvestment. This is usually justified by the need for additional financing of the company's development program without resorting to external loans.

In the financial sector, such measures are often forced to ensure compliance with equity adequacy standards.

Afterword

The well-known principle is perhaps most fully revealed when investing. Of course, it’s great when capital grows like a snowball. But, alas, this does not always happen. And it is very sad when a fortress built with difficulty collapses overnight.

That is why part of the profit should always be invested in new assets. And how to do it correctly, read in the following articles. Subscribe to updates and see you!

In order to achieve the desired rate of return, every investor must know what reinvestment of capital is. Today we will try to dwell in detail on what reinvestment of capital is and what the features of this process are.

The term “reinvestment of capital” usually means the periodic investment of profits received from previous investments. The income received can be invested both in previously used investment instruments and in new ones.

Properly executed reinvestment of capital allows you to ensure the necessary level of security, as well as increase its final profitability.

The reinvestment process is best understood using a specific example. Let’s say an investor invested a thousand dollars in various assets, and a month later received an income of one hundred dollars. The investor can spend these hundred dollars for his own needs or invest in any financial instruments, which will allow him to count on receiving additional income.

Reinvestment of capital. Peculiarities

Many novice investors neglect reinvestment, preferring to spend all the income they receive on their own needs. This happens because they are not aware of the delayed gratification rule.

What the essence of delayed reward is is also best understood using a specific example. Let's say you have volume cash sufficient to purchase the most modern smartphone. If you decide not to buy a smartphone, but spend the available money on investments, then after a certain period of time, you will be able to buy not only a smartphone, but also go to a resort.

Let's say you invested $1,000 in an investment vehicle that generates a return of 10% monthly. So at the end of each month you receive $100. Thus, your finished income will be $1,200.

If in the first month you reinvest the profit received, then interest will be charged not on 1000, but on 1100 dollars. Next month you will receive an income of $100. As a result, your annual income will not be 1200 dollars, but 2138.

If you want to achieve the desired level of profitability of your investment portfolio as quickly as possible, it is necessary not only to constantly reinvest the profits received, but also from time to time to make additional capital injections. So, for example, you can increase the volume of your investment capital, contributing 10% of your salary to it.

Capital reinvestment methods

Currently, there are two main methods of reinvesting capital:

1. Complete.
2. Partial.

Full reinvestment of capital was described above. It involves using all profits received in new investments. Thus, the investor uses all the profit received to constantly increase the size of working capital. This method is usually used by beginning investors for whom investments are not the main method of generating income. Thus, they can afford not to use investment income to meet their own needs. This technique allows you to increase working capital in the shortest possible time.

Partial reinvestment allows using the income received not only to increase working capital, but also to satisfy one’s own needs. When using this method, the investor invests part of the profit received in new investments, and uses the remaining part to satisfy his own needs. Unlike full reinvestment, this method allows you to increase working capital much more slowly. But at the same time, the investor has the opportunity to already enjoy income from investments, which has a positive effect on his psychological state.

If you do not set yourself the goal of increasing the amount of working capital as quickly as possible, then it is best to give preference to partial reinvestment. At the same time, the main thing is to determine the optimal share of income that you will send for reinvestment.

It all depends on the amount of capital invested. If you do not have large capital, then the first time is best spent on reinvesting 80% of the income received. Over time, when your investment capital grows significantly, you can reduce the reinvestment rate to 20%.

Spending profits is nice, but short-sighted

Reinvesting profits - simple and effective way increase capital. A significant portion of successful investors use it, realizing that the more money they invest, the higher the income they receive.

The essence of reinvesting profits is to reinvest them in the same financial instruments in which the original capital was invested, or in other assets. In the first case, interest is calculated on the new, increased amount, and in the second, the investor gets the opportunity to choose, for example, riskier and more profitable investments. The mixed option assumes that part of the profit is reinvested in the same investment products, and part in new ones. In addition, reinvestments can be oriented both for the long term, and an attempt can be made to make money on the profits obtained using short-term speculative tactics. It all depends on the investor’s goals, experience and attitude to risk.

Reinvestment in numbers

Let's consider an example: an investor has $20 thousand, which he puts into trust for 3 years. This investment brings him 10% per annum, that is, $2 thousand annually. This money is the investor’s passive income; after receiving it, he can spend it as he wants. In the case of reinvesting the entire annual income, the investor will receive the same 10% per annum for the second year, but from $22 thousand - that is, $2.2 thousand, for the third year - 10% per annum from $24.2 thousand - $2.42 thousand.

After three years, the investor will have $26,620 in the account. Reinvestment alone generated an additional 10% of income. And this is just a conservative option for investing in foreign currency using trust management. Reinvesting in rubles, where returns often exceed 20-25%, can demonstrate much more impressive results.

Unless you have a pressing need to spend your investment income, be sure to reinvest it. The time during which the fixed capital worked will pass unnoticed, gradually increasing by the amount of profit received and by the amount of income from investment, and the final figure on the account for this period will become more impressive.

Interest capitalization

A special case of reinvestment is the capitalization of interest received on a bank deposit. During capitalization, the accrued interest is added to the base amount of the deposit, and from the next interest period the rate is valid for the increased amount. In this case, the so-called compound interest formula works, ultimately allowing the investor to receive increased income compared to a deposit without capitalization. However, when choosing a deposit with capitalization, you need to carefully compare the rates. As a rule, banks specifically set rates on such deposits several percent lower.

Another important point- frequency of capitalization. It can be annual, quarterly, monthly or even daily. The most profitable for the investor is daily capitalization. Every day, income is added to the deposit amount at the annual rate. interest rate/365". The very next day, both the deposit amount and the accrued interest will be higher than the previous day.

Reinvestment in shares

Income received from buying or selling shares, as well as dividend income, can be used to purchase the same or other shares. Many investors do this: they keep their capital in those stocks that pay the highest dividends, and use the dividend income itself to buy stocks with high growth potential. In this way, a balance is achieved between the protection of capital and the opportunity to obtain high profits through high-risk securities.

As a private investor, make a commitment to regularly reinvest your profits instead of spending your income. Let it not be all the profit, but only 30-40% of it. Even this size of reinvestment can give good results, not to mention the fact that a useful financial habit will be formed.

Some calculations show that on the path to financial independence, it is necessary to reinvest at least half of the net profit. If you can avoid spending your investment income at all, reinvesting it entirely is the fastest way to achieving your financial goals.

Any financial investment involves generating income. It is desirable that its size be larger. Reinvesting capital is one of the ways to increase it - risky, but at the same time, effective. What do reinvestments provide? They help you achieve true financial independence. Let's figure out how it works.

Factors and directions of reinvestment

Reinvestment of capital is when private or legal entity reinvests in any financial instrument the income, dividends or interest that the investment in a particular asset brought. This business strategy is used to turn the profit from an investment into even more income.

The amount earned from reinvestment depends on two main factors:

1. the volume of “re-investment”, or in other words, on whether the entire profit is re-invested, or whether only part of it is invested in any financial instrument;
2. how often reinvestment occurs.

Earnings can be sent to:

• into the same financial instrument (same company, existing deposit). As a matter of fact, reinvestment is considered one of the simplest and most accessible ways to increase investments and your share in any business. By the way, many banks provide clients with the opportunity to reinvest the interest received from the deposit. Thanks to this, along with the deposit, you can increase your profit, because when calculating interest, the added reinvested amount is taken into account;
• With the help of reinvestment, it is also possible to expand your personal investment portfolio. To do this, you need to produce money, place your earnings in other assets (for example, purchase government bonds with the capital that the assets of a private corporation brought in).

Financial and real reinvestment

Reinvestment is divided into several types:

• Financial. This is when the capital received from an investment is invested in instruments that are not tied to a specific profit-generating business. We are talking about PAMM accounts, currencies, and raw materials (oil). For example, they can reinvest in order to receive a stable income. But more often, currency and raw materials are bought in order to make extra money on their short-term growth.
• Real reinvestment. The funds earned are invested in some serious business that can generate stable profits and bring constant dividends. An investor, for example, buys a share in a large corporation, opens or replenishes a long-term deposit, acquires some real estate, land to rent out.

Reinvestment example

To better understand how profitable reinvestment is, here's a simple example:

1. An individual or legal entity buys securities of a company whose value is equal to 10% of its total market capitalization, and after a year receives income equal to 2% of this capitalization.
2. Then, with this 2%, additional shares of the same company are immediately purchased. Thus, the reinvestor already has 12% of the market value of this business.
3. In a year, its dividend will no longer be equal to 2%, but to 2.4% of the value of the business. In general, this investor will already have 14.2% of the company's shares.
4. If he invests them in securities of the same business, then another year later the dividend will increase from 2.4% to almost 2.9%.
5. If an investor buys shares of this company again, he will already have 17.1%! Thus, in just 3 years you can increase your share in the business by more than 70% ((17.1-10)/10)! This is how compound interest works: the profit received is added to the original amount and begins to take part in creating new income.

But if the investor were simply content with the investment, he would receive approximately 30% of his initial contribution, that is, more than half as much.

Increasing profits - important notes about reinvestment

To increase profits with this strategy:

• It is not at all necessary to invest the entire amount of your earnings. For example, Warren Buffett, a famous financier and one of richest people planet, whose wealth at the beginning of 2018 exceeded $100 billion, believes that reinvestment of 50% of income is quite sufficient for a very rapid increase in subsequent income;
• most successful investors reinvest profits once a month. This is very profitable, because for example, if monthly earnings are equal to 10% of the investment, then after just a year the total amount earned from reinvestment will be more than 3.5 times greater than the initial investment. If you reinvest only once a year, the total amount will only double.

A small but successful investment of even an insignificant amount can serve as a start to increasing capital. Reinvesting the income received will gradually increase your financial income. If you constantly study the situation on the market, and do not “go with the flow”, after some time the return on invested capital will become noticeable.

Evgeniy Malyar

Bsadsensedinamick

# Investments

What is it and how to calculate reinvestment interest

Reinvestment is a way to increase the efficiency of an initial investment due to the secondary turnover of income received.

Article navigation

• What is reinvest
• Calculation formulas compound interest reinvestment yield
• Risks of reinvesting profits

An investor who has received income from an investment at least once is faced with a choice: he can spend the funds due to him, or put them back into circulation, in whole or in part. Obviously, increasing the amount of the investment portfolio increases dividends.

What is reinvest

Reinvestment is a way to increase the efficiency of an initial investment due to the secondary turnover of income received.

Having decided what reinvestment is, it is necessary to consider the classification of this concept. There are two types of re-attachment to an object:

1. Reinvest the profit received. In this case, the investor waits for the financial result and operates with funds within its limits. In other words, dividends are received during the cycle (year, quarter, month), and only they serve as a source of re-investment.
2. All incoming funds are invested, regardless of whether the “point zero” has been passed. An example would be a mortgage that is reinvested by the developer buying out the loan agreements. As a result, the investor receives double income: active - from the main activity, and passive from servicing loans secured by real estate.

Thus, reinvestment can be understood as not only repeated, but also additional investment of capital.

In both cases, an increase in the volume of investment capital occurs if the entrepreneur does not “eat up” the income received, but uses it as an alternative to leverage. At the same time, there is an increase not only in the absolute values ​​of income, but also in the percentage of return on investment.

Currently, there is no clear rule regarding the selection of a reinvestment object. There are economists who refer to this concept only as repeated investments in a business that provides a given income. Other experts believe that this factor does not matter, and any component of the overall complex portfolio can become the object of reinvestment if it is appropriate.

Probably, the second point of view is more justified, since the economic result is more important than formal principles.

Formulas for calculating compound interest on reinvestment returns

The ROI formula for return on investment is simple. It represents the ratio of the amount of income received in one cycle to the amount of funds invested in the business.

In coefficient expression it looks like this:

Where:
ROI is an indicator of return on investment;
P – the amount of profit for cycle number i;
I – investment amount;
i – investment cycle number.

The task of calculating the efficiency of reinvestment is significantly complicated by the need to calculate “interest accruing on interest.”

Assuming stability of the value of the current profitability of an investment over a certain time interval, its value, in the case of repeated reinvestment, will look like this:

Where:

It is clear from the formula that if no reinvestment was made, that is, there was only one cycle, then RORI will be equal to ROI.

With one cycle of reinvestment of all income received, n = 2, which gives a quadratic increase in the return on investment. All subsequent cycles ensure profit growth in the corresponding power law.

Where:
P – amount of income in monetary units;
RORI – reinvestment profitability ratio for n cycles;
M – the amount of the initial investment;
ROI – current indicator of return on investment;
n – number of reinvestment cycles.

Let's look at an example of calculating the profitability of reinvestment.

An investor invested 100 thousand rubles in the company's securities. Over the year they brought in an income of 12 thousand rubles.

The investment is characterized by current profitability:

Which in percentage terms is 12%.

Having received such a financial result, the investor decided to reinvest (reinvest) all received dividends in the same enterprise. It remains to calculate the profitability ratio of this operation:

Which corresponds to 25.44 percent, that is, more than twice as high as it was before reinvestment.

If the investor decides to reinvest the received added capital into the business again, then in another year the profitability of his investment will increase by 1.12 times:

So, after three years, every ruble invested in the business will provide an income of more than 40.49 kopecks, if dividends are not withdrawn, but invested in the business.

To simplify calculations, a virtual calculator for the return on compound interest with reinvestment has been developed, available at the link:

Calculator

When using this tool, you should consider some of its features.

In the investment period field, you should enter the number of periods for each of which income is accrued. In the example discussed above, it is 3, since the rate is annual. If dividends are paid monthly, then the annual rate of return must be divided by 12, and only then enter the duration in months in the investment term field.

The convenience of the electronic form is also evident in the fact that the investor can calculate the consequences of partial withdrawal of funds from circulation. To implement this option, you should fill in the “deposit/withdrawal amount” field with a “+” or “-” sign, respectively. It is difficult to make such calculations manually.

Risks of reinvesting profits

The above story about how such reinvestment of profits can create the illusion of the universality of this method of generating excess income. In fact, this is not entirely true. Invested money, unfortunately, is not always able to multiply at a speed that increases with each period.

Firstly, the above calculations are initially based on the assumption that the interest rate of return remains stable. However, there is always a risk of volatility due to the transience of market conditions.

Second, if reinvestment takes an explicit financial form, there is a danger that stocks or bonds will fall in stock price.

These and other circumstances determined by economic realities may lead to the fact that the profitability ratio calculated on the basis of optimistic forecasts will not be achieved. Moreover, there is a possibility that its actual value will be negative, which means reinvestment is unprofitable.

It is the fear of financial losses that makes many rentiers refuse to reinvest and prefer “bird in hand”.

Is it possible to protect invested capital from dangers as much as possible? Yes, there are such methods. Successful reinvestment is facilitated by the use of the following techniques:

• Increasing the number of cycles. The more often an investor receives dividends, the higher the likelihood of an objective assessment of the profitability of the investment.
• Increasing the amount of the initial investment. If the forecast is positive, then you can earn more in a short period of time only if you invest a large amount. At the same time, short-term forecasts are more reliable.
• Quick response to changing conditions. If the profitability of an investment falls sharply, you should redistribute the portfolio in the direction of the greatest benefit as soon as possible.
• Multidirectional distribution of reinvestments, that is, diversification of not only primary but also repeated investments.

It is also necessary to understand the fact that there can be no absolutely reliable reinvestment.