You can imagine compounding or compound investing is like a rolling snowball. The ball starts out small, but with each rotation, it grows larger as more snow sticks to it. That’s the same way compounding works!
For example, today you invested a little snowball ($100) into a company. A few months later your snowball has grown by 10%. And because the company is awfully nice, they’ve given you some extra cash (known as dividends), say ten dollars. Now suddenly your snowball is worth $120. If you continue to let your snowball grow and you get ten bucks each year, by year 20 years your investment will be worth 12 times its original price! For younger investors, compounding is a great investing tool. Just start with a little snowball and let compounding do its thing.
Tips and tricks
The earlier you start investing, the longer you can benefit from compounding magic.