Put in simple terms, compounding it is what happens when you take an initial sum of money (the principal) and increase it over and over again by a percentage. Suppose that today you invest 10,000 CHF in a security for 1 year, and that this security earns you a return of 5%. If at the end of the 1 year period, you reinvest the extra money generated ( 5% x 10n000 CHF = 500 CHF) along with the initial 10,000CHF in another 5% yielding security for another 1 year, you are basically compounding….because you can repeat that process indefinitely, i.e. reinvesting the interests accumulated along with the principal, your wealth can grow at a faster rate as each year you earn a return on a bigger sum of money. That’s why compounding is a powerful ally for investors.