What is Compound Interest?
Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. Over time it produces exponential growth, which is why it is central to long-term investing.
Example
Invest $10,000 at 8% compounded annually and you have about $21,600 after 10 years, the extra growth comes from interest earning interest.
Related terms
Inflation
Inflation is the rate at which the general level of prices for goods and services rises over time, reducing the purchasing power of money. Moderate inflation is normal in a growing economy; high inflation erodes savings.
Mutual Fund
A mutual fund pools money from many investors to buy a professionally managed portfolio of stocks, bonds, or other assets. Investors own units proportional to their contribution.
Dividend
A dividend is a portion of a company’s profits paid out to shareholders, usually in cash and on a regular schedule. It is one way investors earn a return from owning stock.