Compound

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Compound

A thing that is composed of two or more separate elements; a mixture of principal and earnings. Investments that reinvest income grow at a faster rate. Earnings generated on both capital and the accumulated income. [2]

Compound interest arises when interest is added to the principal, so that from that moment on, the interest that has been added also itself earns interest. This addition of interest to the principal compounds the return. [3]

Returns compound on the sum of all past earnings as well as on the principal. For example, suppose $1000.00 (the principal) is used to buy shares in a closed-end company yielding 10 percent compounded annually. At the end of year 1, $100.00 is earned. At the end of year 2, the income is $110.00, $100.00 on the original principal and $10.00 on the interest - an so on in future years. [4]

As investors use the term, compounding everything is expressed as total return. The change in value of an investment over a given period, assuming reinvestment of any dividends and capital gain distributions, expressed as a percentage of the initial investment. [5] The total return includes dividends, capital gains distributions, and the increase in the net asset value of the property. [1]

From 14c to put together, to mix, combine. [2]

References

  1. Mutual Funds: An Introduction to the Core Concepts by Dr. Mark Mobius ISBN-10: 0470821434 pg 83
  2. [1]
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