Compound interest

Interest calculated not just on the original amount invested (the principal) but also on interest already earned in prior periods — "interest on interest." For example, $1,000 at 5% annual compound interest grows to $1,050 after year one, then $1,102.50 after year two (5% of $1,050, not just the original $1,000). Over long periods this compounding effect is a major driver of investment growth.