capital (finance)
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Financial capital (also simply known as capital or equity in
finance Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of Production (economics), production, Distribution (economics), distribution, and Consumption (economics) ...
,
accounting Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such as businesses and corporations. Accounting, which has been calle ...
and
economics Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and intera ...
) 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
business Business is the practice of making one's living or making money by producing or Trade, buying and selling Product (business), products (such as goods and Service (economics), services). It is also "any activity or enterprise entered into for pr ...
es 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 Investment banking pertains to certain activities of a financial services company or a Corporate structure, corporate division that consist in advisory-based financial transactions on behalf of individuals, corporations, and governments. Tradition ...
, 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 (and
investors An investor is a person who allocates financial capital with the expectation of a future Return on capital, return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some specie ...
) to businesses in order to purchase real capital equipment or services for producing new goods and/or services. In contrast, real capital (or economic capital) 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 Value (economics), valuable financial assets or property, physical possessions which can be converted into a form that can be used for financial transaction, transactions. This includes the core meaning as held in the ...
, 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. Under a financial concept of capital, such as ''invested money'' or ''invested purchasing power'', capital is synonymous with the net assets or equity 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 (economics), 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 prod ...
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 fina ...
(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 debtor, 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 ...
. 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 Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, ...
for a more detailed description of how financial capital may be analyzed. Furthermore, financial capital, is any liquid medium or mechanism that represents
wealth Wealth is the abundance of Value (economics), valuable financial assets or property, physical possessions which can be converted into a form that can be used for financial transaction, transactions. This includes the core meaning as held in the ...
, or other styles of
capital Capital may refer to: Common uses * Capital city, a municipality of primary status ** List of national capitals, List of national capital cities * Capital letter, an upper-case letter Economics and social sciences * Capital (economics), the dura ...
. 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 ...
or " productive capital" 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 A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simulta ...
s.


Sources of capital

* Long term – usually above 7 years **
Share Capital A corporation's share capital, commonly referred to as capital stock in the United States, is the portion of a corporation's Shareholders' equity, equity that has been derived by the issue of Share (finance), shares in the corporation to a shareh ...
**
Mortgage loan A mortgage loan or simply mortgage (), in civil law (legal system), 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 ...
** Retained Profit **
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 financial instrument, 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 creat ...
**
Project finance Project finance is the long-term finance, financing of infrastructure and industrial projects based upon the cash flow forecast, projected cash flows of the project rather than the balance sheets of its sponsors. Usually, a project financing structu ...
* 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 A lease is a contract A contract is a legally enforceable agreement between two or more Party (law), parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goo ...
**
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 Service (economics), services are bought on credit. Trade credit facilitates the purchase of supplies without immediate payment. Trade credit is commonly used by busines ...
** Deferred Expenses ** Factoring


Capital market

* Long-term funds are bought and sold: ** Shares **
Debenture In corporate finance, a debenture is a medium- to long-term debt financial instrument, 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 creat ...
** Long-term loans, often with a mortgage bond 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 debt, unsecured promissory note with a fixed Maturity (finance), maturity of rarely more than 270 days. In layperson terms, it is like an "wikt:IOU, IOU" but can be bought and so ...
** Credit on open account ** Bank overdraft ** Short-term loans ** Bills of exchange ** 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 law, trust or partnership) that is registered by the corporation as the ...
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 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 equity, 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. It has to be optimized as a high leverage can bring a higher profit but create
solvency Solvency, in finance Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of Production (economics), production, Distribution (economics), distribution, and C ...
risk. Borrowed capital is capital that the business borrows from institutions or people, and includes debentures: * Redeemable debentures * Irredeemable debentures * Debentures to bearer * Ordinary
debenture In corporate finance, a debenture is a medium- to long-term debt financial instrument, 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 creat ...
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

A
contract A contract is a legally enforceable agreement between two or more Party (law), parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, Service (economics), ser ...
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 int ...
s is called a
financial instrument Financial instruments are monetary Contract, contracts between parties. They can be created, traded, modified and settled. They can be cash (currency), evidence of an ownership interest in an entity or a contractual right to receive or deliver in ...
, 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 Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to an ...
, *
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 most ...
. 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 In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balanc ...
", "
mark-to-market Mark-to-market (MTM or M2M) or fair value accounting is accounting for the "fair value In accounting and in most schools of economic thought, fair value is a rational and unbiased Prediction, estimate of the potential market price of a good ...
" 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,
credit Credit (from Latin verb ''credit'', meaning "one believes") is the Trust (social sciences), trust which allows one Party (law), party to provide money or resources to another party wherein the second party does not reimburse the first party im ...
(i.e.
social capital Social capital is "the networks of relationships among people who live and work in a particular society, enabling that society to function effectively". It involves the effective functioning of social groups through interpersonal relationships ...
held by banks and their depositors), or
commodity In economics Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the beh ...
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, Wikt:currens, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or currency in circulation, circulation as a medium of exchange, for example ba ...
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 Security (finance)#Debt, short-term securities became a commodity, the mone ...
. 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 ...
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 most ...
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 security (finance), securities, known as the secondary market. This is usually in th ...
s or reinsurance markets with varying degrees of trust in the
social capital Social capital is "the networks of relationships among people who live and work in a particular society, enabling that society to function effectively". It involves the effective functioning of social groups through interpersonal relationships ...
(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 bank, commercial banking system. In contrast to a commercial ba ...
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 Floating interest rate, variable interest rates may be expressed as a percentage above or below ...
, increasing it by some fixed percentage. Other instruments, such as citizen entitlements, e.g. " U.S. Social Security", or other pensions, may be indexed to the rate of inflation, to provide a reliable value stream. Trading in
stock market A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses; these may include ''securities'' listed on a public stock exchange, as ...
s or
commodity market A commodity market is a Market (economics), market that trades in the Primary sector of the economy, primary economic sector rather than manufactured products, such as Cocoa bean, cocoa, fruit and sugar. Hard commodities are mined, such as gol ...
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. 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 Capital may refer to: Common uses * Capital city, a municipality of primary status ** List of national capitals, List of national capital cities * Capital letter, an upper-case letter Economics and social sciences * Capital ( ...
, by consumers, i.e.
social capital Social capital is "the networks of relationships among people who live and work in a particular society, enabling that society to function effectively". It involves the effective functioning of social groups through interpersonal relationships ...
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 (economics), capital resulting from investment in producing learning materials. Education finance Capital (economics) {{education-stub ...
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 as ...
. Some enterprises issue instruments to specifically track one limited division or brand. " Financial futures", "
Short selling In finance, being short in an asset means investing in such a way that the investor will profit if the Market value, value of the asset falls. This is the opposite of a more conventional "Long (finance), long" Position (finance), position, wh ...
" 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,
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 ...
, and all other styles of
capital Capital may refer to: Common uses * Capital city, a municipality of primary status ** List of national capitals, List of national capital cities * Capital letter, an upper-case letter Economics and social sciences * Capital (economics), the dura ...
, especially
human capital Human capital is a concept used by social scientists to designate personal attributes considered useful in the production process. It encompasses employee knowledge, skill, skills, know-how, good health, and education. Human capital has a subst ...
or labor, is assumed in
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 bank, commercial banking system. In contrast to a commercial ba ...
policy and regulations regarding instruments as above. Such relationships and policies are characterized by a
political economy Political economy is the study of how Macroeconomics, economic systems (e.g. Marketplace, markets and Economy, national economies) and Politics, political systems (e.g. law, Institution, institutions, government) are linked. Widely studied ph ...
feudalist,
socialist 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 ...
,
capitalist Capitalism is an economic system based on the private ownership of the means of production and their operation for Profit (economics), profit. Central characteristics of capitalism include capital accumulation, competitive markets, pric ...
,
green Green is the color Color (American English) or colour (British English) is the visual perception, visual perceptual Physical property, property deriving from the spectrum of light interacting with the photoreceptor cells of the eyes ...
,
anarchist Anarchism is a political philosophy and Political movement, movement that is skeptical of all justifications for authority and seeks to abolish the institutions it claims maintain unnecessary coercion and Social hierarchy, hierarchy, typi ...
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 Circulation (curren ...
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 reductio ...
, or on
measuring well-being Quality of life (QOL) is defined by the World Health Organization The World Health Organization (WHO) is a list of specialized agencies of the United Nations, specialized agency of the United Nations responsible for international public h ...
, 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 dif ...
, 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, pr ...
,
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 structu ...
,
anarchism Anarchism is a political philosophy and movement that is skeptical of all justifications for authority and seeks to abolish the institutions it claims maintain unnecessary coercion and hierarchy, typically including, though not necess ...
, 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, where profit is made from the manufacture of goods.


Marxist perspectives

It is common in
Marxist Marxism is a Left-wing politics, left-wing to Far-left politics, far-left method of socioeconomic analysis that uses a Materialism, materialist interpretation of historical development, better known as historical materialism, to understand S ...
theory to refer to the role of finance capital as the determining and ruling class interest in capitalist society, particularly in the latter stages.


See also

*
Capital market A capital market is a financial market in which long-term debt (over a year) or Equity (finance), equity-backed security (finance), securities are bought and sold, in contrast to a money market where short-term debt is bought and sold. Capital m ...
*
Constant item purchasing power accounting Constant purchasing power accounting (CPPA) is an accounting model that is an alternative to model historical cost accounting under high inflation and hyper-inflationary environments. It has been approved for use by the International Accounting St ...
*
Financial risk management Financial risk management is the practice of protecting Value (economics), economic value in a business, firm by using financial instruments to manage exposure to financial risk - principally operational risk, credit risk and market risk, with more ...
*
Financialization Financialization (or financialisation in British English) is a term sometimes used to describe the development of financial capitalism during the period from 1980 to present, in which Financial leverage, debt-to-equity ratios increased and fina ...
*
Funding Funding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money, it can also take the form of effort or time from an organization or company. Generally, this word is used when a firm uses ...
*
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 Circulation (curren ...
*
List of finance topics The following Outline (list), outline is provided as an overview of and topical guide to finance: Finance – addresses the ways in which individuals and organizations raise and allocate monetary factors of production, resources over time, ta ...


References


Difference between Shares and Debentures


Further reading

*F. Boldizzoni, ''Means and Ends: The Idea of Capital in the West, 1500-1970'', New York: Palgrave Macmillan, 2008, chapters 7-8 {{Authority control sv:Finansiellt kapital