Capital

Written by Fmi.Online Friday January 6, 2023
Capital refers to the financial resources that businesses can use to fund their operations like cash, machinery, equipment and other resources. These are the assets that allow the business to produce a product or service to sell to customers.

Explanation :

This is a vital source of financing across all types of businesses because companies need these resources in order to operate. Businesses raise capital by issuing stocks and bonds  to investors who purchase these financial instruments with cash or other assets. It’s important to distinguish money from capital because they aren’t the same thing. Capital is more durable than money and is used to produce something and build wealth. Property rights give capital it’s value and allow it to generate revenues and build wealth. Equipment, machinery, patents, trademarks, brand names, buildings, and land are a few examples

Examples :

Ana is the CEO of a large conglomerate that has various business lines in the insurance and energy industries. Her company wants to build a new energy plant that will need to be funded in the next year. A majority of her managers have come to her with multiple proposals for a total of $100,000,000. This is an extremely large expense that has to be funded this year in order to expand operations. In order to fund this, Ana must use a variety of resources including the cash and short-term investments that the company holds as well as sell company stock to new investors.

Types of Capital

 
  • Debt Capital
A business can acquire capital by borrowing. This is debt capital, and it can be obtained through private or government sources. For established companies, this most often means borrowing from banks and other financial institutions or issuing bonds. For small businesses starting on a shoestring, sources of capital may include friends and family, online lenders, credit card companies, and federal loan programs.
  • Equity Capital
Equity capital can come in several forms. Typically, distinctions are made between private equity, public equity, and real estate equity.Private and public equity will usually be structured in the form of shares of stock in the company. The only distinction here is that public equity is raised by listing the company's shares on a stock exchange while private equity is raised among a closed group of investors.
  • Working Capital
A company's working capital is its liquid capital assets available for fulfilling daily obligations. It is calculated through the following two assessments:
  • Current Assets – Current Liabilities
  • Accounts Receivable + Inventory – Accounts Payable
  • Trading Capital
Any business needs a substantial amount of capital in order to operate and create profitable returns. Balance sheet analysis is central to the review and assessment of business capital. Trading capital is a term used by brokerages and other financial institutions that place a large number of trades on a daily basis. Trading capital is the amount of money allotted to an individual or the firm to buy and sell various securities.  

Capital vs. Money

 

At its core, capital is money. However, for financial and business purposes, capital is typically viewed from the perspective of current operations and investments in the future. Capital usually comes with a cost. For debt capital, this is the cost of interest required in repayment. For equity capital, this is the cost of distributions made to shareholders. Overall, capital is deployed to help shape a company's development and growth.

In a nutshell:

  • The capital of a business is the money it has available to pay for its day-to-day operations and to fund its future growth.
  • The four major types of capital include working capital, debt, equity, and trading capital. Trading capital is used by brokerages and other financial institutions.
  • Any debt capital is offset by a debt liability on the balance sheet.
  • The capital structure of a company determines what mix of these types of capital it uses to fund its business.
  • Economists look at the capital of a family, a business, or an entire economy to evaluate how efficiently it is using its resources.
top-arrow
Our Courses are designed to boost your career

Launch your career with Fmi’s Learning Pathway

Choose a learning pathway that best meets your needs and ambitions. Not sure which Fmi learning pathway is right for you? Explore our CareerBuddy videos for help and advice.

Investment banking pathway
  • courses-clock60+ hours
  • courses-desktop9 courses

Investment banking offers many exciting career opportunities for students. From Financial Analysts to Investment Management, and Sales & Trading to a wide range of roles in infrastructure such as IT, Risk or Compliance. This pathway is designed to help you understand the investment banking industry, the roles investment banks are recruiting for, and most importantly, help you to develop the practical skills you need to get into the industry and your preferred role whether this be as part of a school leaver, intern or graduate program.

FMI Online Student join-student-img2 FMI Online Student
55,000+ students currently enrolled
Global markets pathway
  • courses-clock70+ hours
  • courses-desktop10 courses

Global markets provide a range of important products and services to corporates, institutions and governments worldwide from executing trades and managing risk to providing quality research content. A key business area in all investment banks, global markets offers a wide range of career paths for students to consider across all functions and at all levels from school leavers to internships through to graduate programs.

FMI Online Student join-student-img2 FMI Online Student
85,000+ students currently enrolled
Asset management pathway
  • courses-clock50+ hours
  • courses-desktop8 courses

The asset management industry is a global industry worth over 100 trillion US dollars. It plays a crucial role in managing the assets of retail and institutional investors, offering a wide range of exciting careers in doing so. If you’re looking to forge a career in asset management, our Asset management pathway is perfect for you. We help you build the skills all asset managers are looking for and explore everything you need to know about the industry and the wide range of roles available in the sector

FMI Online Student join-student-img2 FMI Online Student
100,000+ students currently enrolled