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Compound interest (compounding)

Compounding is earning returns on your past returns, so an investment can grow at an accelerating pace the longer it is left to work.

Compound interest — or compounding — is the process by which the returns an investment earns themselves start earning returns. Reinvest a stock’s dividends or let gains ride, and next period you earn on a larger base. Over long horizons this snowball effect becomes the dominant driver of wealth: the same annual return produces dramatically more over 30 years than over 10, because growth builds on growth.

The two levers that matter most are time and rate. A modest return compounded for decades can outpace a higher return over a short period, which is why starting early is so powerful. Compounding also works in reverse for costs: high fees, compounded over time, quietly erode a large share of the final result.

stocks-llm surfaces the dividends and cash returns companies generate, but it does not project or promise any compounded return. This definition is educational only.

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Related terms

  • Bull market & bear market — A bull market is a sustained period of rising stock prices and optimism; a bear market is a sustained decline, conventionally a drop of 20% or more from a peak.
  • Diversification — Diversification is spreading investments across many companies, sectors, and asset types so that no single loss can sink the whole portfolio.
  • Dollar-cost averaging — Dollar-cost averaging is investing a fixed amount at regular intervals regardless of price, so you buy more shares when prices are low and fewer when high.
  • Recessions & stocks — A recession is a broad, sustained decline in economic activity; stock prices often fall ahead of one and recover before it ends, because markets look forward.
  • Inflation & stocks — Inflation is a general rise in prices that erodes purchasing power; it affects companies unevenly and shapes the interest rates that drive stock valuations.

See more terms in the stocks-llm glossary.

Informational only — NOT financial advice. This is an educational definition, not a recommendation to buy or sell anything. Metrics on stocks-llm are delayed data and may be missing or stale. Always verify information independently and consult a qualified financial professional before making any investment decision.