Compound

You have $10,000. You take it to a bank. The bank gives you an interest rate of 5%, which means you earn $500 per year. That is your first-year return on your investment. You can go spend that money, or you can let keep it in your account and reinvest your capital. After the second year, your $10,500 would be worth $11,025. You would still be receiving a 5% return, but because you’ve allowed your reinvested previous interest to “compound,” you have received an additional $25 in the second year.

Though the bank interest rate remains 5%, your two-year (compound) return was actually 5.125% on your original investment.

Compound returns apply to all types of investments over a period of time. For example, when you reinvest dividends, those cash payments compound on the yields achieved through stock ownership. And if you’re not reinvesting dividends to achieve that compounding effect, you’re giving away free, earned money. Um...stop doing that.