How does compound interest work, and how does it differ from simple interest in terms of long-term investment growth?

Compound interest works by calculating interest on both the initial principal and the accumulated interest from previous periods. This means that over time, the interest grows at an accelerating rate because each period's interest is added to the principal. The more frequently interest is compounded, the faster the investment grows. Simple interest, on the other hand, is calculated only on the initial principal, meaning that the interest does not accumulate over time. Each period, the interest amount remains the same, leading to linear growth. In terms of long-term investment growth, compound interest tends to outperform simple interest because the interest earned in earlier periods earns additional interest in later periods. This compounding effect can lead to significantly higher returns over time, especially in investments held for many years.