Compounding occurs when you add your investment earnings or savings account interest to your original investment, forming a larger foundation upon which future earnings may accumulate. As your principal increases in size, your rate of return will apply to a larger sum, enabling your money to grow faster. The longer you invest, the more you can take advantage of compounding.
Many corporations offer DRIPs, which allow you to reinvest dividends to buy additional shares of the company's stock. If the dividend is not large enough to pay for an additional share, payments are accumulated in an account until shares can be purchased.
Like with a DRIP, you can reinvest earnings and capital gain distributions from a mutual fund to purchase additional shares of the fund. Because investors typically buy fractions of shares in mutual funds, earnings are reinvested immediately and do not have to be held in a separate account until whole shares can be purchased.
Investors should consider the investment objectives, risks, charges, and expenses of mutual funds carefully before investing. A prospectus contains this and other information about the fund and is available through www.scottrade.com or through a Scottrade branch office. The prospectus should be read carefully before investing.