What Is Compound Interest?

Compound interest refers to the process in investing where the returns or profits generated are reinvested, allowing those earnings to subsequently generate additional returns. In simple terms, it's "interest on interest."

When you choose to reinvest investment earnings back into the principal, those returns can produce further gains. This compounding effect accelerates investment growth because each calculation is based on the total accumulated amount (principal + previously earned returns).

Example
Assume you invest $1,000 with a 10% annual return. If you reinvest the earnings:

• Year 1: $100 profit → Total grows to $1,100

• Year 2: 10% return on $1,100 → $110 profit → Total reaches $1,210
  Over time, compounding exponentially increases growth.

Compound interest is powerful for long-term investing as it dramatically boosts wealth accumulation. However, it requires time to work effectively—thus, long-term commitment and patience are essential to harness its full potential.