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It is widely in the human nature to name and create language. It is written in the Christian Bible that one of man's first tasks was to name each animal in turn. Words are continually entering and leaving our language, with defining institutions like the Oxford English Dictionary struggling to keep up.
Neologisms are often created by combining existing words or giving words new and unique suffixes and/or prefixes. The word "video" has long been used to describe any visual image on a television screen, and "tape" to a thin strip: "videotape" is an invented word, named by combining the words for two of its key features. (a phrase like "compact disc" is not considered a neologism, since neither word was changed or re-defined in its creation). And the words "video" and "audio" themselves were not borrowed from the Latin until the twentieth century, when new technology required words to define the two concepts. Words which are combined are often shortened or lengthened, such as "smoke" and "fog" becoming smog.
Neologisms can also be created through abbreviation, acronym (such as laser), by intentionally rhyming with existing words, or simply through playing with sounds. It is very rare, however, for a word to enter common use if it does not resemble another word or words in an identifiable way. (In these cases, strange new words succeed because the idea behind them is especially memorable or exciting, such as, again, laser).
A recent example of a neologism is the word dot-com, denoting a company that relies on the internet for most or all of its business, which arose due to the frequency of businesses including ".com" in their company name. As the internet became a major market force, it required the creation of an easy term to describe these businesses. This is an easily pin-pointed example of how a new idea quickly becomes a new word, usually based on a void in the current language or a need to expedite the expression of an idea which is gain popularity. Neologisms often enter the language through mass media, the internet, or through word of mouth - especially, many linguists suspect, by younger people.