Stock market basics · updated October 21, 2026
What is compound interest and how is it calculated
Compound interest means your gains earn gains too: each year grows on top of the balance at the end of the year before, not just on the starting amount. Over long periods, the difference becomes huge.
Compound interest formula
- r
- The yearly return, as a decimal (7% becomes 0.07).
- n
- The number of years.
Worked example
You invest $10,000 once, at 7% a year, for 20 years, and reinvest everything.
Without compounding (7% only on the starting amount, $700 a year) you would have reached $24,000. The $14,697 difference comes from reinvested gains.
Worth knowing
A quick rule: divide 72 by the yearly return to find how many years it takes your money to double. At 7% a year, about 10 years.
When compound interest can fool you
It works in reverse too: fees and inflation also compound, year after year. Returns are not constant: on the stock market, 7% is an average; some years are negative.
Related terms
Learn it in the Academy
Questions about compound interest
What is the rule of 72?
A quick estimate: 72 divided by the yearly return gives roughly how many years it takes to double your money. At 6%, 12 years; at 9%, 8 years.
Why does starting early matter?
Because the number of years is the exponent in the formula. The same amount invested 10 years earlier can end up almost twice as large, at 7% a year.
These explanations are for information only. They are not a recommendation to buy or sell.
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