Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. Unlike simple interest (which is calculated only on principal), compound interest grows exponentially — the longer the time horizon, the more dramatic the effect.
The formula is: A = P(1 + r/n)^(nt), where P = principal, r = annual rate (decimal), n = compounding periods per year, t = years.
More frequent compounding (daily vs. annually) produces slightly higher returns due to more frequent reinvestment of earned interest.