What is capital
Capital, a pivotal economic concept, encompasses both monetary and intrinsic value held by individuals and companies.
Capital takes on different meanings in personal and business contexts, often revolving around wealth accumulation, property ownership, and financial instruments.
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. The liquidity of financial capital distinguishes it from physical capital, influencing its marketability.
In contrast, physical capital comprises tangible assets like machinery, inventory, tools, and buildings.
These assets generally take longer to sell, making them less liquid compared to financial capital. Physical capital further divides into production and consumption capital. Production capital aids in creating goods or services, while consumption capital includes direct assets like housing and schools. The distinction between fixed and liquid capital depends on the durability and continuous use of the assets.
Debt and equity
Understanding a company’s capital structure involves acknowledging debt and equity components. Debt capital involves borrowed funds, usually from banks, while equity is the value contributed by the owners. Equity can be invested during the company’s inception or accumulated over time, including earned profits. This dichotomy of financing shapes a company’s financial health and risk profile.
Capital for individuals
On an individual level, capital encompasses the entirety of one’s wealth, spanning property, assets, and bank balances. In personal finance, equity often becomes a focal point, particularly in real estate transactions. When purchasing a home, equity represents the savings used for the acquisition, influencing borrowing capabilities and affordability.