Long-term investing
Compound interest
Definition
Growth in which each period’s return is added to the balance, so later returns are earned on a larger base.
Example
Suppose $10,000 earns a hypothetical 7% a year and every return is reinvested. After 10 years the balance is $19,671.51, while simple interest of $700 a year, never reinvested, would reach only $17,000. The extra $2,671.51 is return earned on earlier returns, and the gap keeps widening the longer the money stays invested.
Hypothetical numbers, for illustration only.
Also defined in
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