Compound interest is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods. Thought to have originated in 17th-century Italy, compound interest can be thought of as "interest on interest," and will make a sum grow at a faster rate than simple interest, which is calculated only on the principal amount.
The rate at which compound interest accrues depends on the frequency of compounding, such that the higher the number of compounding periods, the greater the compound interest. For example, a $1,000 investment with 10% annual interest compounded annually would be worth $1,100 after one year. If it were compounded semi-annually, it would be worth $1,102.50.
The most important factor in compound interest is time. Because interest is earned on interest, the growth starts slow but accelerates over time. This is why starting to save or invest early, even with small amounts, can lead to significant wealth over several decades.