Financial Terms / C - D / Compounding

Compounding

The principle of compounding is interest on interest. In compound interest calculations,  the interest is added to the principal and the interest you have already earned/paid. Due to this, the amount you make/pay as interest over a long period becomes magnified.

In investing specifically, compounding relates to an asset that can generate earnings, producing more significant gains when reinvested or kept untouched. Compound interest can be a boon or a bane; the one who understands it earns it (investing in income-generating assets), and the ones who don't understand it pay it (high-interest loans, credit card bills).