 If the return is reinvested, it contributes to the starting value of capital invested for the next period (or reduces it, in the case of a negative return).Compounding reflects the effect of the return in one period on the return in the next period, resulting from the change in the capital base at the start of the latter period.For example, if an investor puts $1,000 in a 1-year certificate of deposit (CD) that pays an annual interest rate of 4%, paid quarterly, the CD would earn 1% interest per quarter on the account balance.