Compound Return
What Is Compound Return?
Compound return refers to the growth of an investment when earnings are reinvested and generate additional earnings over time. Instead of receiving returns only on the original investment, compound returns allow investors to earn returns on both the principal and previously accumulated gains.
Compound return is a core concept in long-term investing.
Why It Matters
Compounding allows investments to grow faster over long periods. By reinvesting dividends, interest, or capital gains, investors benefit from exponential growth rather than simple linear growth.
This concept is especially powerful for investors who start early and remain invested for long periods.
How Compound Return Works
Compound return occurs when investment gains are reinvested into the investment.
Over time, the investment earns returns on:
- the original principal
- previous earnings
- reinvested dividends or interest
As time passes, the compounding effect accelerates investment growth.
Example
An investor who invests $10,000 and earns a 7% annual return will earn $700 in the first year. In the second year, the investment grows based on the new total of $10,700 rather than the original $10,000.
Compound Return vs Simple Return
- Compound return includes earnings on previous returns.
- Simple return calculates returns based only on the original investment.
FAQs About Compound Return
Why is compound return important?
It significantly increases long-term investment growth.
Do dividends contribute to compound return?
Yes, if dividends are reinvested.
Does compounding work with all investments?
Most investments can compound when earnings are reinvested.
Related Terms
- Compound Interest
- Compound Growth
- Investment Returns
- Dividend Reinvestment Plan (DRIP)
- Long-Term Investing
