Compound interest

Compound interest describes a simple mechanic: what you earn stays in the capital and produces in turn. A thousand at 10% over three periods does not give 1,300 but 1,331 · the 31 difference is interest on interest.

The point of this tool is not to manufacture a projection. It is to make something counter-intuitive visible: stretching the duration often does more than raising the rate. Doubling the number of periods changes the result more than doubling the percentage.

The formula

Final capital = capital × (1 + rate) to the power of the number of periods. With regular contributions, each deposit is added after the period is computed and starts working in the next one.

A worked example

1,000 at 10% per period: after one period 1,100, after two 1,210, after three 1,331. Without the carry-over you would have 1,300. The gap looks trivial over three periods · over thirty, the capital is multiplied by 17 instead of 4.

What this number does not tell you

It assumes a CONSTANT rate, and that assumption does not exist in trading · nobody makes the same percentage every period. A single negative period breaks the curve for every one that follows, and the calculation does not account for it. It also ignores taxes, fees and withdrawals. It is a mechanic, not a forecast.

The classic mistake

Taking the curve for a promise. "5% a month" typed into a box gives a magnificent figure after two years · it assumes twenty-four months in a row without a single losing one, which almost nobody achieves. The calculation is right, the assumption is not.

Frequently asked questions