What is compounding in banking?

Compounding is the repeated addition of interest payments to the principal invested over a period of time. The principal grows exponentially as each new payment of interest is added to it. The higher the number of compounding periods, the greater the amount of compound interest will be.

What is compounding interest?

Compounding thus can be construed as interest on interest—the effect of which is to magnify returns to interest over time, the so-called “miracle of compounding.” When banks or financial institutions credit compound interest, they will use a compounding period such as annual, monthly, or daily.

What is compounding in investing?

What Is Compounding? In investing, compounding involves reinvesting the earnings an asset generates so they produce additional gains over time. Compounding is a powerful investment tool because it not only provides gains as a regular investment would, but it also leverages those gains to earn even more.