Compound

AAA

DEFINITION of 'Compound'

The ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings. In other words, compounding refers to generating earnings from previous earnings.

Also known as "compound interest".

INVESTOPEDIA EXPLAINS 'Compound'

Suppose you invest $10,000 into Cory's Tequila Company (ticker: CTC). The first year, the shares rises 20%. Your investment is now worth $12,000. Based on good performance, you hold the stock. In Year 2, the shares appreciate another 20%. Therefore, your $12,000 grows to $14,400. Rather than your shares appreciating an additional $2,000 (20%) like they did in the first year, they appreciate an additional $400, because the $2,000 you gained in the first year grew by 20% too. If you extrapolate the process out, the numbers can start to get very big as your previous earnings start to provide returns. In fact, $10,000 invested at 20% annually for 25 years would grow to nearly $1,000,000 (and that's without adding any money to the investment)!

The power of compounding was said to be deemed the eighth wonder of the world - or so the story goes - by Albert Einstein.

VIDEO

Loading the player...
RELATED TERMS
  1. Compound Annual Growth Rate - CAGR

    The year-over-year growth rate of an investment over a specified ...
  2. Compound Interest

    Interest calculated on the initial principal and also on the ...
  3. Interest

    1. The charge for the privilege of borrowing money, typically ...
  4. Rule Of 72

    A rule stating that in order to find the number of years required ...
  5. Compounding

    The ability of an asset to generate earnings, which are then ...
  6. Dividend

    A distribution of a portion of a company's earnings, decided ...
RELATED FAQS
  1. How does a company decide when it is going to split its stock?

    There are no set guidelines or requirements that determine when a company will split its stock. Often, companies that see ... Read Full Answer >>
  2. Can small investors buy collateralized mortgage obligations (CMOs)?

    Collateralized mortgage obligations (CMOs), which are pools of mortgage-backed securities (MBS), are available to smaller ... Read Full Answer >>
  3. How does a bond's coupon rate affect its price?

    A bond's coupon rate has a large effect on its market price because it dictates the amount of income the bond generates per ... Read Full Answer >>
  4. Why should investors care about the Days Sales of Inventory (DSI)?

    The days sales of inventory measures the value, liquidity and cash flows of a company's inventory, as well as its management ... Read Full Answer >>
  5. Why are some spin-offs taxable and some are tax-free?

    The manner in which a parent company structures the spinoff and divests itself of a subsidiary or division determines whether ... Read Full Answer >>
  6. How do no-load funds typically perform relative to load funds?

    No-load mutual funds are pooled investments that do not carry an upfront sales charge when purchased or a deferred sales ... Read Full Answer >>
Related Articles
  1. Retirement

    Top 4 Reasons To Save For Retirement Now

    No more excuses. Make sure you are financially secure and independent for your golden years.
  2. Investing Basics

    Understanding The Time Value Of Money

    Find out why time really is money by learning to calculate present and future value.
  3. Investing Basics

    Invest Without Stress

    Have anxiety? Don't worry. We have your worry-free investing guide right here.
  4. Options & Futures

    3 Simple Steps To Building Wealth

    Getting richer is easier if you take it one step at a time.
  5. Insurance

    Your Financial Life: From Stressful To Stress-Free

    Find out how to get the ball rolling on your future financial security. Then sit back and watch things unfold.
  6. Options & Futures

    Pick Stocks Like Peter Lynch

    Learn the basic tenets that helped this famous investor earn his fortune.
  7. Investing

    The Case For Stocks Today

    Last week, U.S. equities advanced with the S&P 500 Index notching new records. Investors are now getting nervous with rate and currency volatility spiking.
  8. Mutual Funds & ETFs

    Why You May Want To Be (And Stay) In Bonds

    Bonds are complicated, and it’s easy to feel intimidated or confused. Fortunately, you don’t need to be a numbers geek to be an informed investor.
  9. Economics

    Tech Startup Momentum Being Generated In Detroit

    Rising from the ashes in the once proud auto-manufacturing City of Detroit is a rapidly emerging tech startup scene that could prove to be its salvation.
  10. Investing

    TradeKing Vs. TradeStation: Which Meets Your Needs?

    Each of these two online brokerage firms offers a package of benefits, features and services that meets a distinct type of investor's needs.

You May Also Like

Hot Definitions
  1. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  2. Productivity

    An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in ...
  3. Variance

    The spread between numbers in a data set, measuring Variance is calculated by taking the differences between each number ...
  4. Terminal Value - TV

    The value of a bond at maturity, or of an asset at a specified, future valuation date, taking into account factors such as ...
  5. Rule Of 70

    A way to estimate the number of years it takes for a certain variable to double. The rule of 70 states that in order to estimate ...
  6. Risk Premium

    The return in excess of the risk-free rate of return that an investment is expected to yield. An asset's risk premium is ...
Trading Center