Compounding basics
How is compound return calculated?
A practical explanation of how returns become part of the next base amount.
Compounding means each period starts from the amount after previous gains. The longer the period, the more the result behaves like a curve rather than a straight line.
3 min read
Simple return vs. compound return
Simple return calculates profit only from the original principal. If 1,000,000 grows by 1% simple return per day, the daily gain stays fixed.
Compound return adds the previous gain back into the base. Day two is calculated from the amount after day one, not from the original principal alone.
The basic formula
The common formula is final amount = principal x (1 + rate)^period. A daily rate of 1% is written as 0.01, and 20 days means raising that factor to the 20th power.
ReturnLab uses this idea to compare multiple rates or multiple durations on the same screen.
Why duration matters
With compounding, the base amount changes after every period. A 200-day result is not simply ten times a 20-day result.
The duration comparison mode exists to make this non-linear growth easier to see.