Compounding
When gains start earning gains of their own, growth builds up over time.
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Compounding happens when the returns from an investment are added to it and start producing returns themselves. Over time, growth builds on growth.
A simple example
Imagine $1,000 that grows by 7% each year. After the first year it becomes $1,070. In the second year, the 7% applies to $1,070, not just to the original $1,000. After 10 years it is about $1,967, and after 30 years about $7,612. The yearly rate never changed; time did most of the work.
Keep in mind
This example uses a steady 7% to show the math. Real investments don't grow smoothly: some years go up, some go down, and there is no guaranteed rate.
Compounding in companies
The same idea applies to businesses. A company whose grows 10% a year for ten years ends up with about 2.6 times the revenue it started with. That is one reason StockLab shows five-year trends instead of a single year.
Compounding also works against you: fees charged every year, or losses, add up over time in the same way.