Definition
The process by which interest earned on an investment is added back to the amount invested, so increasing the amount of 'principal' on which further interest will be earned in future years.
Compounding is sometimes described as the miracle of investing. The fact is that if you reinvest income in your portfolio, you will end up with a much larger amount than if you spend the income as you go along because of the effect of compounding. But to allow compounding to work its magic, you have to start young.
Albert Einstein, when asked what he considered to be mankind's greatest invention, replied 'Compound interest!'