Growth earned on both the original capital and the returns accumulated in earlier periods.
How it works
Compounding occurs when returns remain invested, so later gains or losses apply to both the starting capital and earlier results. Contributions, fees, taxes, inflation, and the sequence of returns all affect the outcome.
Example
At a constant 5% annual rate, 1,000 grows to 1,050 after one year and 1,102.50 after two years before fees and taxes.
Limitations
Illustrations often assume a smooth return that markets do not deliver. A projected rate is not a promise, and negative returns compound too.
Evidence LedgerHow this insight was built
Human reviewedThesis being tested
This definition explains Compound Interest accurately, with its practical use and material limitations.
Key assumptions
- The named calculation or convention is stated where definitions vary.
- The example is illustrative and not a forecast or recommendation.
What could invalidate the view
- A different market, instrument, jurisdiction, or methodology may use the term differently.
- The cited authority may revise its guidance or terminology.
- Editorial ownership
- Market Master · reviewed
- Approval state
- Reviewed financial content
- Evidence currency
- Current evidence window
- Source coverage
- 1 documented source
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