What is compounding?

Compounding is the process in which an assets earnings are reinvested to generate additional earnings over time.

This growth, calculated using exponential functions, occurs because the investment will generate earnings from both its initial principal, and the accumulated earnings from preceding periods. Compounding, therefore, differs from linear growth, where only the principal earns interest at each period.

Here is an example.

Say you start with 2000GBP in your trading account. In the first month, we increase the capital by 20%.

On the second month, your 400GBP profit gained from the first month will have increased your balance to 2400GBP. Instead of withdrawing your profit, you would leave it in the trading account. The second month will then hit 20% ROI again, turning your 2400GBP into 2880GBP.

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Compound Example