Financial capital (also simply known as capital or equity in finance,

accounting Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entities such as businesses and corporations. Accounting, which has been called the "languag ...

and

economics Economics () is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics analyzes ...

) is any economic resource measured in terms of

money Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are as ...

used by

entrepreneur Entrepreneurship is the creation or extraction of economic value. With this definition, entrepreneurship is viewed as change, generally entailing risk beyond what is normally encountered in starting a business, which may include other values t ...

s and businesses to buy what they need to make their products or to provide their services to the sector of the economy upon which their operation is based, ''e.g.'', retail, corporate, investment banking, etc. In other words, financial capital is internal

retained earnings The retained earnings (also known as plowback) of a corporation is the accumulated net income of the corporation that is retained by the corporation at a particular point of time, such as at the end of the reporting period. At the end of that peri ...

generated by the entity or funds provided by

lenders A creditor or lender is a party (e.g., person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property ...

(and

investors An investor is a person who allocates financial capital with the expectation of a future return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some species of property. Type ...

) to businesses in order to purchase

real capital In economics, capital goods or capital are "those durable produced goods that are in turn used as productive inputs for further production" of goods and services. At the macroeconomic level, "the nation's capital stock includes buildings, ...

equipment or services for producing new goods and/or services. In contrast,

(or

economic capital In finance, mainly for financial services firms, economic capital (ecap) is the amount of risk capital, assessed on a realistic basis, which a firm requires to cover the risks that it is running or collecting as a going concern, such as market r ...

) comprises physical goods that assist in the production of other goods and services, e.g. shovels for gravediggers, sewing machines for tailors, or machinery and tooling for factories.

IFRS concepts of capital maintenance

''Financial capital'' generally refers to saved-up financial

wealth Wealth is the abundance of valuable financial assets or physical possessions which can be converted into a form that can be used for transactions. This includes the core meaning as held in the originating Old English word , which is from an I ...

, especially that used in order to start or maintain a business. A financial concept of capital is adopted by most entities in preparing their

financial reports Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form which is easy to un ...

. Under a financial concept of capital, such as ''invested money'' or ''invested purchasing power'', capital is synonymous with the

net assets Net worth is the value of all the non-financial and financial assets owned by an individual or institution minus the value of all its outstanding liabilities. Since financial assets minus outstanding liabilities equal net financial assets, net ...

equity Equity may refer to: Finance, accounting and ownership * Equity (finance), ownership of assets that have liabilities attached to them ** Stock, equity based on original contributions of cash or other value to a business ** Home equity, the dif ...

of the entity. Under a physical concept of capital, such as operating capability, capital is regarded as the

productive capacity Productive capacity is the maximum possible output of an economy. According to the United Nations Conference on Trade and Development (UNCTAD), no agreed-upon definition of maximum output exists. UNCTAD itself proposes: "the productive ''resources'' ...

of the entity based on, for example, units of output per day. Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power. Constant item purchasing power accounting#CIPPA as per the IASB's Framework.5B14.5D .5B15.5D Constant item purchasing power accounting Accordingly, there are three concepts of capital maintenance in terms of

International Financial Reporting Standards International Financial Reporting Standards, commonly called IFRS, are accounting standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB). They constitute a standardised way of describing the company's f ...

(IFRS): # Physical capital maintenance; # Financial capital maintenance in nominal monetary units; and # Financial capital maintenance in units of constant purchasing power. Financial capital is provided by lenders for a price:

interest In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distin ...

. Also see

time value of money The time value of money is the widely accepted conjecture that there is greater benefit to receiving a sum of money now rather than an identical sum later. It may be seen as an implication of the later-developed concept of time preference. The ...

for a more detailed description of how financial capital may be analyzed. Furthermore, financial capital, is any liquid medium or mechanism that represents

, or other styles of capital. It is, however, usually purchasing power in the form of money available for the production or purchasing of goods, etcetera. Capital can also be obtained by producing more than what is immediately required and saving the surplus. Financial capital can also be in the form of purchasable items such as computers or books that can contribute directly or indirectly to obtaining various other types of capital. Financial capital has been subcategorized by some academics as

economic An economy is an area of the production, distribution and trade, as well as consumption of goods and services. In general, it is defined as a social domain that emphasize the practices, discourses, and material expressions associated with the ...

or "

productive capital The means of production is a term which describes land, labor and capital that can be used to produce products (such as goods or services); however, the term can also refer to anything that is used to produce products. It can also be used as an ...

" necessary for operations, signaling capital which signals a company's financial strength to shareholders, and regulatory capital which fulfills

capital requirement A capital requirement (also known as regulatory capital, capital adequacy or capital base) is the amount of capital a bank or other financial institution has to have as required by its financial regulator. This is usually expressed as a capital ...

Sources of capital

* Long term – usually above 7 years ** Share Capital **

Mortgage loan A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any ...

Retained Profit The retained earnings (also known as plowback) of a corporation is the accumulated net income of the corporation that is retained by the corporation at a particular point of time, such as at the end of the reporting period. At the end of that per ...

Venture capital Venture capital (often abbreviated as VC) is a form of private equity financing that is provided by venture capital firms or funds to start-up company, startups, early-stage, and emerging companies that have been deemed to have high growth poten ...

Debenture In corporate finance, a debenture is a medium- to long-term debt instrument used by large companies to borrow money, at a fixed rate of interest. The legal term "debenture" originally referred to a document that either creates a debt or acknowle ...

Project finance Project finance is the long-term financing of infrastructure and industrial projects based upon the projected cash flows of the project rather than the balance sheets of its sponsors. Usually, a project financing structure involves a number of equi ...

* Medium term – usually between 2 and 7 years ** Term Loans **

Revenue-based financing Revenue-based financing or royalty-based financing (RBF) is a type of financial capital provided to small or growing businesses in which investors inject capital into a business in return for a fixed percentage of ongoing gross revenues, with paymen ...

** Leasing **

Hire Purchase A hire purchase (HP), also known as an installment plan, is an arrangement whereby a customer agrees to a contract to acquire an asset by paying an initial installment (e.g., 40% of the total) and repaying the balance of the price of the asset pl ...

* Short term – usually under 2 years ** Bank Overdraft **

Trade credit Trade credit is the loan extended by one trader to another when the goods and services are bought on credit. Trade credit facilitates the purchase of supplies without immediate payment. Trade credit is commonly used by business organizations as ...

** Deferred Expenses ** Factoring

Capital market

* Long-term funds are bought and sold: ** Shares **

** Long-term loans, often with a

mortgage bond A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any p ...

as security ** Reserve funds ** Euro Bonds

Money market

* Financial institutions can use short-term savings to lend out in the form of short-term loans: **

Commercial paper Commercial paper, in the global financial market, is an unsecured promissory note with a fixed maturity of rarely more than 270 days. In layperson terms, it is like an " IOU" but can be bought and sold because its buyers and sellers have some ...

** Credit on open account ** Bank overdraft ** Short-term loans **

Bills of exchange A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time, whose payer is usually named on the document. More specifically, it is a document contemplated by or consisting of a ...

** Factoring of debtors

Differences between shares and debentures

Shareholders A shareholder (in the United States often referred to as stockholder) of a corporation is an individual or legal entity (such as another corporation, a body politic, a trust or partnership) that is registered by the corporation as the legal ow ...

are effectively owners; debenture-holders are creditors. * Shareholders may vote at AGMs ( Annual General Meetings, alternatively Annual Shareholder Meetings) and be elected as directors; debenture-holders may not vote at AGMs or be elected as directors. * Shareholders receive profit in the form of dividends; debenture-holders receive a fixed rate of interest. * If there is no profit, the shareholder does not receive a dividend; interest is paid to debenture-holders regardless of whether or not a profit has been made. *In case of

dissolution Dissolution may refer to: Arts and entertainment Books * ''Dissolution'' (''Forgotten Realms'' novel), a 2002 fantasy novel by Richard Lee Byers * ''Dissolution'' (Sansom novel), a 2003 historical novel by C. J. Sansom Music * Dissolution, in mu ...

the firm's debenture holders are paid first, before shareholders.

Types of capital

Fixed capital

Fixed capital is money firms use to purchase assets that will remain permanently in the business and help it make a profit. Factors determining fixed capital requirements: * Nature of business * Size of business * Stage of development * Capital invested by the owners * location of that area

Working capital

Firms use working capital to run their business. For example, money that they use to buy stock, pay expenses and finance credit. Factors determining working capital requirements: * Size of business * Stage of development * Time of production * Rate of stock turnover ratio * Buying and selling terms * Seasonal consumption * Seasonal product *profit level *growth and expansion *production cycle *general nature of business *business cycle *business policies *Debt ratio

Own and borrowed capital

Capital contributed by the owner or entrepreneur of a business, and obtained, for example, by means of savings or inheritance, is known as own capital or

, whereas that which is granted by another person or institution is called borrowed capital, and this must usually be paid back with interest. The ratio between debt and equity is named

leverage Leverage or leveraged may refer to: *Leverage (mechanics), mechanical advantage achieved by using a lever * ''Leverage'' (album), a 2012 album by Lyriel *Leverage (dance), a type of dance connection *Leverage (finance), using given resources to ...

. It has to be optimized as a high leverage can bring a higher profit but create

solvency Solvency, in finance or business, is the degree to which the current assets of an individual or entity exceed the current liabilities of that individual or entity. Solvency can also be described as the ability of a corporation to meet its long-t ...

risk. Borrowed capital is capital that the business borrows from institutions or people, and includes debentures: * Redeemable debentures *

Irredeemable debentures ''Irredeemable'' is an American comic book series written by Mark Waid, drawn by Peter Krause and Diego Barreto, and published by Boom! Studios. The series follows the fall of the world's greatest superhero, the Plutonian, as he begins slaught ...

* Debentures to bearer * Ordinary

debenture In corporate finance, a debenture is a medium- to long-term debt instrument used by large companies to borrow money, at a fixed rate of interest. The legal term "debenture" originally referred to a document that either creates a debt or acknowle ...

s * bonds * deposits *loans Own capital is capital that owners of a business (shareholders and partners, for example) provide: * Preference shares/hybrid source of finance ** Ordinary preference shares ** Cumulative preference shares ** Participating preference shares * Ordinary shares * Bonus shares * Founders' shares These have preference over the equity shares. This means the payments made to the shareholders are first paid to the preference shareholder(s) and then to the equity shareholders.

Instruments

contract A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to tr ...

regarding any combination of

capital asset A capital asset is defined as property of any kind held by an assessee, whether connected with their business or profession or not connected with their business or profession. It includes all kinds of property, movable or immovable, tangible or i ...

s is called a financial instrument, and may serve as a *

medium of exchange In economics, a medium of exchange is any item that is widely acceptable in exchange for goods and services. In modern economies, the most commonly used medium of exchange is currency. The origin of "mediums of exchange" in human societies is ass ...

, *

standard of deferred payment In economics, standard of deferred payment is a function of money. It is the function of being a widely accepted way to value a debt, thereby allowing goods and services to be acquired now and paid for in the future. The 19th-century economist W ...

, *

unit of account In economics, unit of account is one of the money functions. A unit of account is a standard numerical monetary unit of measurement of the market value of goods, services, and other transactions. Also known as a "measure" or "standard" of rela ...

, or *

store of value A store of value is any commodity or asset that would normally retain purchasing power into the future and is the function of the asset that can be saved, retrieved and exchanged at a later time, and be predictably useful when retrieved. The mos ...

. Most indigenous forms of money (wampum, shells, tally sticks and such) and the modern

fiat money Fiat money (from la, fiat, "let it be done") is a type of currency that is not backed by any commodity such as gold or silver. It is typically designated by the issuing government to be legal tender. Throughout history, fiat money was sometime ...

are only a "symbolic" storage of value and not a real storage of value like commodity money.

Valuation

Normally, a financial instrument is priced accordingly to the perception by capital market players of its expected return and risk. Unit of account functions may come into question if valuations of complex financial instruments vary drastically based on timing. The "

book value In accounting, book value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization or impairment costs made against the asset. T ...

", "

mark-to-market Mark-to-market (MTM or M2M) or fair value accounting is accounting for the " fair value" of an asset or liability based on the current market price, or the price for similar assets and liabilities, or based on another objectively assessed "fair ...

" and " mark-to-future" conventions are three different approaches to reconciling financial capital value units of account.

Issuing and trading

Like money, financial instruments may be "backed" by state

military fiat Military fiat is a process whereby a decision is made and enforced by military means without the participation of other political elements. The Latin term ''fiat'', translated as "let it be," suggests the autocratic attitude ascribed to such a proce ...

credit Credit (from Latin verb ''credit'', meaning "one believes") is the trust which allows one party to provide money or resources to another party wherein the second party does not reimburse the first party immediately (thereby generating a debt) ...

(i.e. social capital held by banks and their depositors), or commodity resources. Governments generally closely control the supply of it and usually require some "reserve" be held by institutions granting credit. Trading between various national

currency A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins. A more general def ...

instruments is conducted on a

money market The money market is a component of the economy that provides short-term funds. The money market deals in short-term loans, generally for a period of a year or less. As short-term securities became a commodity, the money market became a compon ...

. Such trading reveals differences in probability of

debt collection Debt collection is the process of pursuing payments of debts owed by individuals or businesses. An organization that specializes in debt collection is known as a collection agency or debt collector. Most collection agencies operate as agents of ...

function of that currency, as assigned by traders. When in forms other than money, financial capital may be traded on

bond market The bond market (also debt market or credit market) is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the secondary market. This is usually in the form of bonds, bu ...

s or reinsurance markets with varying degrees of trust in the social capital (not just credits) of bond-issuers, insurers, and others who issue and trade in financial instruments. When payment is deferred on any such instrument, typically an interest rate is higher than the standard interest rates paid by banks, or charged by the central bank on its money. Often such instruments are called fixed-income instruments if they have reliable payment schedules associated with the uniform rate of interest. A variable-rate instrument, such as many consumer mortgages, will reflect the standard rate for deferred payment set by the

central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union, and oversees their commercial banking system. In contrast to a commercial bank, a central b ...

prime rate A prime rate or prime lending rate is an interest rate used by banks, usually the interest rate at which banks lend to customers with good credit. Some variable interest rates may be expressed as a percentage above or below prime rate. Use in dif ...

, increasing it by some fixed percentage. Other instruments, such as

citizen entitlement Citizenship is a "relationship between an individual and a state to which the individual owes allegiance and in turn is entitled to its protection". Each state determines the conditions under which it will recognize persons as its citizens, and ...

s, e.g. "

U.S. Social Security In the United States, Social Security is the commonly used term for the Federal government of the United States, federal Old-Age, Survivors, and Disability Insurance (OASDI) program and is administered by the Social Security Administration ( ...

", or other pensions, may be indexed to the rate of inflation, to provide a reliable value stream. Trading in stock markets or

commodity market A commodity market is a market that trades in the primary economic sector rather than manufactured products, such as cocoa, fruit and sugar. Hard commodities are mined, such as gold and oil. Futures contracts are the oldest way of investin ...

s is actually trade in underlying assets which are not wholly financial in themselves, although they often move up and down in value in direct response to the trading in more purely financial

derivatives The derivative of a function is the rate of change of the function's output relative to its input value. Derivative may also refer to: In mathematics and economics * Brzozowski derivative in the theory of formal languages * Formal derivative, an ...

. Typically commodity markets depend on politics that affect international trade, e.g. boycotts and embargoes, or factors that influence

natural capital Natural capital is the world's stock of natural resources, which includes geology, soils, air, water and all living organisms. Some natural capital assets provide people with free goods and services, often called ecosystem services. All of t ...

, e.g. weather that affects food crops. Meanwhile, stock markets are more influenced by trust in corporate leaders, i.e.

individual capital Individual capital, the economic view of talent, comprises inalienable or personal traits of persons, tied to their bodies and available only through their own free will, such as skill, creativity, enterprise, courage, capacity for moral example, ...

, by consumers, i.e. social capital or "brand capital" (in some analyses), and internal organizational efficiency, i.e.

instructional capital Instructional capital is a term used in educational administration after the 1960s, to reflect capital Capital may refer to: Common uses * Capital city, a municipality of primary status ** List of national capital cities * Capital letter, an ...

and

infrastructural capital Public capital is the aggregate body of government-owned assets that are used as a means for productivity.Aschauer, D. A. (1990). Why is infrastructure important? Conference Series roceedings Federal Reserve Bank of Boston. Pp. 21-68. Such asset ...

. Some enterprises issue instruments to specifically track one limited division or brand. "

Financial future In finance, a futures contract (sometimes called a futures) is a standardized legal contract to buy or sell something at a predetermined price for delivery at a specified time in the future, between parties not yet known to each other. The asset ...

s", "

Short selling In finance, being short in an asset means investing in such a way that the investor will profit if the value of the asset falls. This is the opposite of a more conventional "long" position, where the investor will profit if the value of the ...

" and " financial options" apply to these markets, and are typically pure financial bets on outcomes, rather than being a direct representation of any underlying asset.

Broadening the notion

The relationship between financial capital,

, and all other styles of capital, especially human capital or

labor Labour or labor may refer to: * Childbirth, the delivery of a baby * Labour (human activity), or work ** Manual labour, physical work ** Wage labour, a socioeconomic relationship between a worker and an employer ** Organized labour and the la ...

, is assumed in

policy and regulations regarding instruments as above. Such relationships and policies are characterized by a

political economy Political economy is the study of how economic systems (e.g. markets and national economies) and political systems (e.g. law, institutions, government) are linked. Widely studied phenomena within the discipline are systems such as labour ...

–

feudalist Feudalism, also known as the feudal system, was the combination of the legal, economic, military, cultural and political customs that flourished in medieval Europe between the 9th and 15th centuries. Broadly defined, it was a way of structu ...

socialist Socialism is a left-wing economic philosophy and movement encompassing a range of economic systems characterized by the dominance of social ownership of the means of production as opposed to private ownership. As a term, it describes the e ...

capitalist Capitalism is an economic system based on the private ownership of the means of production and their operation for profit. Central characteristics of capitalism include capital accumulation, competitive markets, price system, priva ...

green Green is the color between cyan and yellow on the visible spectrum. It is evoked by light which has a dominant wavelength of roughly 495570 nm. In subtractive color systems, used in painting and color printing, it is created by a combi ...

, anarchist or otherwise. In effect, the means of

money supply In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circul ...

and other regulations on financial capital represent the economic sense of the value system of the society itself, as they determine the allocation of labor in that society. So, for instance, rules for increasing or reducing the money supply based on perceived

inflation In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduct ...

, or on

measuring well-being Quality of life (QOL) is defined by the World Health Organization as "an individual's perception of their position in life in the context of the culture and value systems in which they live and in relation to their goals, expectations, standards ...

, reflect some such

values In ethics and social sciences, value denotes the degree of importance of something or action, with the aim of determining which actions are best to do or what way is best to live (normative ethics in ethics), or to describe the significance of di ...

, reflect the importance of using (all forms of) financial capital as a stable store of value. If this is very important, inflation control is key - any amount of money inflation reduces the value of financial capital with respect to all other types. If, however, the medium of exchange function is more critical, new money may be more freely issued regardless of impact on either inflation or well-being.

Economic role

Socialism Socialism is a left-wing Economic ideology, economic philosophy and Political movement, movement encompassing a range of economic systems characterized by the dominance of social ownership of the means of production as opposed to Private prop ...

capitalism Capitalism is an economic system based on the private ownership of the means of production and their operation for profit. Central characteristics of capitalism include capital accumulation, competitive markets, price system, priva ...

feudalism Feudalism, also known as the feudal system, was the combination of the legal, economic, military, cultural and political customs that flourished in medieval Europe between the 9th and 15th centuries. Broadly defined, it was a way of structur ...

, anarchism, and other civic theories take markedly different views of the role of financial capital in social life, and propose various political restrictions to deal with that. Financial capitalism is the production of profit from the manipulation of financial capital. It is held in contrast to

industrial capitalism Capitalism is an economic system based on the private ownership of the means of production and their operation for profit. Central characteristics of capitalism include capital accumulation, competitive markets, price system, private ...

, where profit is made from the manufacture of goods.

Marxist perspectives

It is common in Marxist theory to refer to the role of finance capital as the determining and ruling class interest in capitalist society, particularly in the latter stages.

References

Difference between Shares and Debentures