Returns that themselves earn returns, period after period
Compounding means the interest or distributions you receive are added to the principal, so the next round of return is calculated on the larger amount. Against simple interest, which pays only on the original sum, the gap widens the longer you hold. In investing it happens when payouts are reinvested rather than spent. The same mechanism works in reverse when values fall.
At 5% a year, $10,000 becomes $15,000 in 10 years simple, or about $16,300 compounded.
For learning, not investment advice. Decisions are your own.
StockFit · TrueNorthLabs Inc.