When an investment produces a gain and you leave that gain invested, the following year you earn a return not only on your original money but also on the gain from before. Over one or two years the effect is small, but over decades it grows dramatically, because each year builds on a larger base than the last. This snowball effect is why many experienced investors say that time in the market matters more than trying to pick the perfect moment to invest.
The most important ingredient in compounding is time. Starting earlier, even with small amounts, often beats starting later with larger amounts, because the early money has more years to grow. Reinvesting income such as dividends, rather than spending it, keeps the process working at full strength.
Compounding also works in reverse when it comes to costs. Fees charged every year are taken from the base that would otherwise keep compounding, so even a small annual charge can quietly consume a large share of your long-term gains. Keeping costs low lets more of the compounding effect work in your favour.
This content is general information, not investment advice.