Compounding

Compounding is a process that allows an investor to earn interest on an amount of money that has been invested wherein the earnings are then reinvested into the same business or investment. This is also known as compounding interest. If an investor chooses to do this, then she could earn interest on the original principal as well as all the interest that has been previously accumulated.

Compounding interest

So, basically, the investor would be earning interest on interest. This can prove to be a very effective and productive investment mechanism because the investor’s money continually feeds upon itself, which allows it to grow at a considerably faster rate compared to simple interest.