The main task that entrepreneurs set for themselves is to make a profit. This receipt represents an element from which was received after production and sold as cash to the enterprise. Profits can be used in many ways. Next, we will consider one of them, which allows us to expand the scope of the organization’s activities.

Terminology

Reinvesting profits is a relatively cheap way to finance a business. The purpose of the ongoing activities is to expand business activities. And the degree of such development of the organization is shown by the reinvestment ratio. In this case, the correct distribution of proceeds, including among the participants of the joint-stock company, is very important. During the procedure, it is important to take into account the interests of the entire society, specific entrepreneurs and personnel.

The essence of the process

Reinvestment is a repetition of the procedure for investing initial income. It is carried out in order to obtain additional income. To explain it more simply, we can say that reinvestment is an increase in the deposit at the expense of money considered as interest. They are accrued in the period between the re-investment of finances in the development of the enterprise.

Benefit

We can say with certainty that reinvestment is a profitable procedure. After all, in essence, new percentages are added to the existing ones. This procedure is often called “complicated, it is considered an addition to the initial capital. But Russian banks rarely provide reinvestment services. Or they offer conditions that make the deal less profitable. But in other countries, reinvestment has gained wide popularity.

Income dependence

So under what conditions should reinvestment be carried out so that the investor can reap the maximum benefit? Income will be greater if the procedure is performed more often. Reinvesting interest once a month can be considered very profitable. The most successful option is an investment made every week.

PAMM accounts

You can talk about the features of reinvestment using the description of PAMM accounts. This type of investing is more accessible and requires less initial capital. There are other positive aspects too. Thus, manipulations with a cash account (depositing and withdrawing funds) are available at any time. In the case of PAMM accounts, the manager, in addition to the investor’s money, has his own. Reinvestment is a procedure that necessarily occurs if the deposit is with a company. The investor is only required to replenish the account and withdraw funds from it. It is not necessary to do the latter - you can leave the money. Then they will become part of the contribution. But to be on the safe side, it’s worth transferring parts of your profits to different accounts. You can do a simple calculation. If an investment of ten thousand dollars makes a profit of four percent, then after the next reinvestment the percentage will be calculated from the new amount, that is, from ten thousand four hundred dollars.

Rules

Interest earnings will accrue while reinvestments are made. The degree of profitability of this procedure is determined by the amount of the deposit and its duration. Regular investing increases the initial capital, while reinvesting affects the amount of profit received. It is important not to rush to withdraw interest income. It is advisable to redirect them into reinvestment.

Is it true that reinvesting capital is a financial panacea?

Each investor must decide for himself whether he should turn to such a distribution of funds as the main one. After all, when choosing this method of earning money, it is important to have the ability to feel the market, to be quick to react to any changes within its limits, and not to be afraid of risk. If we compare capitalization with receiving income from stocks, we can say that reinvestment is a less risky way. But even this method is threatened by inflation.

Final part

Distribution of net profit is carried out by enterprises. If we turn to the law, it becomes clear that the distributed part goes to the federal budget or to the budget of another constituent entity of our country, representing tax or other mandatory payments. We can say that that part of the enterprise's profit that was obtained through reinvestment is internal to the organization. The income received in this way protects the company's budget from additional expenses. If an organization is engaged in reinvestment, then the number of shareholders of this enterprise remains unchanged.

Spending profits is nice, but short-sighted

Reinvesting profits is a simple and effective way to 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 is the 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 rate of “annual 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.

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.

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• What is reinvest
• Formulas for calculating compound interest on reinvestment returns
• 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 term 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. Actually this is not true. Invested money, unfortunately, is not always able to multiply at a rate 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.

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.”

In simple terms, 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, another interesting example of how compound interest works 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. Suppose the trading profitability is 10% per month, half of which 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!

Obtaining additional income without significant labor costs is the task that reinvestment is aimed at solving. This process involves making profitable investments in financial instruments again or in addition to an existing investment portfolio. The objects of reinvestment may be different each time.

What is reinvestment

Reinvestment refers to the repeated investment of resources that were received as a result of already completed investment projects. The main goal of these activities is to make a profit in the short and long term. Reinvestments can be divided into:

1. Real and financial.
2. Full and partial.

FOR REFERENCE! Full reinvestment differs from partial reinvestment in the volume of repeated investments. If all the profit received from the project is recirculated, then this will be a complete reinvestment; if part of the resources received remains with the investor for current expenses, and the rest is transferred into investments, then this will be a partial reinvestment.

Real investments mean investing money in the creation of assets involved in the operating activities of enterprises. They can take the form:

• replacement when updating outdated and broken equipment;
• rationalization during modernization activities affecting the production cycle, equipment and technologies;
• production expansion - this format is carried out as a gradual injection of resources to increase production volumes;
• diversification - it is necessary to expand the product range and increase sales markets;
• non-profit reinvestment, when investments are made in environmental projects or aimed at ensuring safety as prescribed by regulatory authorities.

Financial reinvestment is aimed at exploiting a number of financial instruments: deposits in banking institutions, Forex, securities trading. Such deposits can be long-term or have a speculative component.

A type of financial reinvestment is compound interest (interest reinvestment).

The essence of this method of earning money is to constantly increase the amount of investment on which interest is accrued. The investment resource is increased by adding interest earned for the previous period to the main “body” of the deposit. A striking example is bank deposits with interest capitalization.

Investments in stock markets can be made through PAMM accounts. Funds from the account are transferred to traders on trust management terms. The peculiarity of this type of reinvestment is an affordable initial level of investment, loyal conditions for replenishing funds and withdrawing them. An additional plus is the presence of a motivational factor for traders who receive a percentage of the profits from their clients’ investment projects.

Regular profits can be obtained from the following forms of reinvestment:

• opening deposits in banks;
• purchase and sale of currency;
• real estate investments;
• securities;
• investments in expensive art and precious metals;
• forms of trust management.

IMPORTANT! To achieve success, it is necessary not to withdraw all profit from investment turnover, but to invest at least part of it into a new investment portfolio.

The next type of investment is reinvesting dividends. In this case, resource investments do not show signs of diversification; all funds are directed to one project. The action plan is as follows:

• shares of one enterprise are purchased;
• receiving the first amount of dividends (profit from purchased shares);
• The proceeds are used to buy another block of shares in the same company.

The advantage of this method is the possibility of regularly receiving passive income, increasing investment volumes without additional costs on the part of the investor. In the long term, the volume of dividends becomes significant, and the weight of the vote on the Board of Directors increases significantly. The main disadvantage is the risks associated with the lack of diversification of the investment portfolio. By repeatedly investing in the same enterprise, you can find yourself without dividends and your savings if the project fails.

Betting, odds, formula

The reinvestment process is associated with the following key concepts:

1. Reinvestment rate. Shows the percentage value that will be applied to the amount of invested funds when calculating income. The higher the rate, the greater the investor's profit.
2. Reinvestment rate. Reflects the share of net profit that was allocated to a new investment round after receiving dividends. The indicator is calculated by dividing the value of reinvested funds by the amount of net profit.

When reinvesting interest, the term compound interest is used. Such interest rates are calculated using the formula:

SUM = X * (1 + %) n, Where:

• SUM – total sum of calculations;
• X – initial investment amount;
• % - the value of the interest rate for the selected deposit program, calculated in annual percentages;
• n – number of years in the period (or months, quarters, weeks, years).

The formula for determining the rate on interest deposits with capitalization looks like this:

Rate = p * d / y, Where:

• p – deposit interest rate, calculated as annual percentage/100;
• d – the period following which the capitalization of funds begins, expressed in days;
• y – calendar year, presented in days (365 or 366 days).

Example of compound interest calculation

When investing funds on a deposit with compound interest in the amount of 78,000 rubles at an annual interest rate of 7%, the following final profitability indicators will be:

1. At the end of 1 year, the deposit account will have an amount of 83,460 rubles. (78,000+78,000*7%). The profit will be 5,460 rubles. (83,460-78,000).
2. If the funds are reinvested for another year, then at the end of the second year the amount of 89,302.20 rubles will be accumulated in the account. (83,460+83,460*7%). Profit for the year will be 5,842.20 rubles. (89,302.20-83,460).
3. If you continue to reinvest the funds, then at the end of the third year the amount in the account will be 95,553.35 rubles. (89,302.20+89,302.20*7%). Profit for the third year is 6251.15 rubles. (95,553.35-89,302.20).

NOTE! When implementing reinvestment measures, it is necessary to analyze the meaning of the reinvestment rate.

The reinvestment rate reflects the bar within which you can continue to effectively invest in the second round. It characterizes the profitability of the project.

When reinvesting profits by legal entities in their own enterprises, the reinvestment coefficient helps to assess the degree of profitability of the project and the effectiveness of the current resource allocation policy. With a high coefficient, they indicate a significant return of profit into the assets of the enterprise in the form of reinvestment to update equipment, modernize production and increase the productivity of technologies and increase the intensity of sales activities.

IMPORTANT! It is necessary to reinvest profits into the enterprise in order to strengthen market positions and increase sales levels. Pursuing other goals will ultimately result in a decrease in overall profitability.

Formula for calculating the reinvestment rate:

Coefficient = (Reserve capital at the end of the year + Retained profit or uncovered loss at the end of the year – Reserve capital at the beginning of the year – Retained profit or uncovered loss at the beginning of the year) / Profit (net) or loss * 100%

If a coefficient value is below zero, we can talk about serious financial problems of the enterprise and the ineffectiveness of the investment project. An indicator equal to zero indicates that there is no reinvestment; all profits are used to pay dividends. If you want to change the situation, you need to review the organization's dividend policy.

If the coefficient according to the calculation results turns out to be close to 100%, then most of the profit received is put into circulation through reinvestment. In dynamics, a stable increase in the reinvestment ratio indicates that investors and founders of the enterprise consider this project interesting and promising.