Why articles give the stock market as an example for compound interest?

Question

I have read a dozen or so books, including The Intelligent Investor, but I still like to read random articles about investing.

I keep finding articles like this one where they give the stock market as an example to get 9% compound interest on your investment. This article in particular is getting that number from the "STOCK MARKET'S HISTORICAL RATE OF RETURN". I've seen the same example in other articles, videos, etc.

How is that compound interest? If you buy a stock for $100 now and it grows 10% per year, in 10 years it will be worth $200. That's not compounding, it's just capital growth. You can't sell and take your $100 profit to buy more of the stock, because it's now worth $200.

I'm aware that there are companies with very high dividend yield, but not an average of 10% per year for sure.

Am I missing something here? Or are these articles simply misleading?

Answer 1

You're correct that the stock market is not an example of compound interest.

You're incorrect, though, that $100 at 10% growth every year for 10 years is $200. It is, in fact, $259.37 due to the fact that there is compound growth due to capital gains and reinvested dividends: every year the previous value grows by 10%.

Thus, at the end of every year, when starting at $100:

Year    Value
----    -----
 1      $110.00
 2      $121.00
 3      $133.10
 4      $146.41
 5      $161.05
 6      $177.16
 7      $194.87
 8      $214.36
 9      $235.79
10      $259.37