compound interest

Interest computed on the accumulated unpaid interest as well as on the original principal.

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 Says:
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.

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Interest added to interest previously earned on a principal balance. Compounding increases the depositor's rate of return on bank balances and the lender's effective yield on the unpaid principal of outstanding loans. For example: take a $1,000 savings account paying 5% interest, compounded monthly; the effective rate earned is 5.116%, assuming the $1,000 remains on deposit for a full year and no additional deposits are made. The more frequently interest is compounded, the higher the effective rate earned. Contrast with simple interest where interest is computed only on the original principal. See also daily interest; rule of 72.

Interest paid on the original principal and also on the unpaid interest that has accumulated. Contrast with Simple Interest.
Example: $100 deposited in a 5% savings account earns $5 interest the first year. Its second-year earnings are 5% of $105, or $5.25. Each year, interest is received on previously earned but undistributed interest, so interest compounds.

Interest generated by the sum of the principal and any accrued interest.

Interest is normally compounded on a daily, quarterly, or yearly basis. The more often interest is compounded, the larger the principal will grow and the greater the interest the new principal will produce.

Interest that is added not only to the principal of a loan or savings account but also to the interest already added to the loan or account; interest paid on interest.