Compound interest of an investment is defined as the interest calculated on the original principal as well as on the accumulated interest of previous periods of a deposit or a loan. Compound interest is interest on interest and is the only magical way an investment can grow really fast; faster than simple interest. The more the number of compounding period, the higher the rate at which the compound interest accrues, and the greater the compound interest.

To calculate or better understand the compound interest rate on investment, you will need to understand some terms. Some of them are

- PRINCIPAL:

There are several financial meanings to this term; the most common of which is that a principal is the original sum of money borrowed in a loan or put into an investment.

- SIMPLE INTERST:

This is a way of calculating the interest charge on a loan. It is calculated by multiplying the interest rate by principal by time

- DEPOSIT:

A deposit can be defined as a transfer of fund to another party for safe keeping. It can also be defined as a portion of fund that is used as collateral for delivery of service.

- LOAN:

A loan can be money, or other property of value, given to another party in exchange for a future repayment of the principal amount along with interest or other charges, as was agreed on before the loan was granted.

- COMPOUND/COMPOUNDING:

Compound means to reinvest the earnings generated by an asset in order to earn more. In other words, compound or compounding means to generate money from the money already generated. It is also known as compound interest.

- ACCRUES:

In finances, accrues describe the ability of a thing of value to accumulate over a period of time. It is mostly used when referring to interests, income, and expenses.

CALCULATING COMPOUND INTEREST:

The formula for calculating compound interest is:

= [P (1 + i)n] – P

= P [(1 + i)n – 1]

(Where P = Principal, i = nominal annual interest rate in percentage terms, and n = number of compounding periods.

The calculations may be hectic and boring, but it is good that every investor understands the power of compound interest. It is so good that a little amount can grow into a really huge amount with time and the right actions. Compound interest does not differ with investment types; it is the same everywhere as long as the right principles are applied.

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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