← Back to Glossary
Principal Amount
Definition
The principal amount is the initial sum of money invested or borrowed, before any interest, earnings, or fees are added.
Explanation
The principal is the base on which interest is calculated. In investing, it's the money you put in. In borrowing, it's the money you take out. As loans are repaid, the principal decreases. In investments, the principal grows through returns, but can also lose value.
Protecting principal is a priority for conservative investors, while growth investors accept principal risk for higher potential returns.
Example
If you invest $20,000 in a mutual fund, your principal is $20,000. If it grows to $25,000, your principal is still $20,000 and the gain is $5,000.