Capital represents both the money and the value that individuals and companies have.
Capital can mean different things, and it depends on whether you’re talking about personal finances or business matters. Generally, it involves accumulating wealth, owning property, and managing various financial instruments.
Financial capital
Financial capital constitutes assets within a company that can be readily converted into cash.
Examples encompass stocks, securities, bank deposits, and actual cash in the company’s accounts. Gross financial capital represents the entirety of financial assets, while net financial capital deducts debts.
Physical capital
Physical capital are tangible assets. Examples are machinery, inventory, tools, and buildings.
These assets take longer to sell, which makes them less liquid compared to financial capital. Physical capital can be divided into production and consumption capital. Production capital helps in the creation of goods or services, while consumption capital refers to direct assets such as homes and schools.
The difference between fixed and liquid capital is based on how long the assets last and how consistently they can be used. Fixed capital includes long-term assets like machinery, whereas liquid capital covers more fluid resources, like cash, that can be quickly converted or used.
Debt and equity
A company’s capital structure means looking at its mix of debt and equity. Debt capital is money that has been borrowed, typically from banks, and needs to be paid back. Equity is the value that the owners have put into the company. This can include funds invested when the business first started or profits that have been reinvested into the company over time.
The way these two types of financing are balanced is crucial in determining the company’s financial stability and the level of financial risk it faces.
Capital for individuals
Capital sums up your wealth, such as property, assets, and money in the bank. If we look at personal finance, equity is especially important, especially when it comes to buying real estate.
When you buy a home, equity is the portion of savings you use for the purchase. This impacts how much you can borrow and what you can afford.