CAPITAL Definition & Meaning

The interest rates vary depending on the type of capital obtained and the borrower’s credit history. Capital is used by companies to pay for the ongoing production of goods and services to create profit. Companies use their capital to invest in all kinds of things to create value.

• It may be defined on its balance sheet as working capital, equity capital, or debt capital, depending on its origin and intended use.
• Economists monitor several metrics of capital including personal income and personal consumption from the Department of Commerce’s personal income and outlays reports.
• Capitol with a capital “C” refers to the particular building in Washington, D.C.
• Capital assets can be found on either the current or long-term portion of the balance sheet.

Pairs of Commonly Confused Words

Your capital can include the money you have in the bank, property you own, and any stocks or bonds you’ve purchased. In other words, it’s cash in hand that is available for spending, whether on day-to-day necessities or long-term projects. On a global scale, capital is all of the money that is currently in circulation, being exchanged for day-to-day necessities or longer-term wants.

Word History

The word capital has several meanings depending on its context. On a company balance sheet, capital is money available for immediate use, whether to keep the day-to-day business running or to launch a new initiative. It may be defined on its balance sheet as working capital, equity capital, or debt capital, depending on its origin and intended use. Brokerages also list trading capital; that is the cash available for routine trading in the markets.

• Labor and building expansions are two common areas of capital allocation.
• Grace O’Leary, 32, who also lives in Spain’s capital, said she and her mum were counting coins to see if she had enough money to buy wine from a corner shop.
• In the broadest sense, capital can be a measurement of wealth and a resource for increasing wealth.
• In 2020, for example, corporate bond issuance by U.S. companies soared 70% year over year, according to Moody’s Analytics.
• Companies have capital structures that include debt capital, equity capital, and working capital for daily expenditures.

A company that has more liabilities than assets could soon run short of working capital. When an individual investor buys shares of stock, they are providing equity capital to capital simple definition a company. The biggest splashes in the world of raising equity capital come, of course, when a company launches an initial public offering (IPO). Issuing bonds is a favorite way for corporations to raise debt capital, especially when prevailing interest rates are low, making it cheaper to borrow. In 2020, for example, corporate bond issuance by U.S. companies soared 70% year over year, according to Moody’s Analytics.

Average corporate bond yields had then hit a multi-year low of about 2.3%. Individuals quite rightly see debt as a burden, but businesses see it as an opportunity, at least if the debt doesn’t get out of hand. It is the only way that most businesses can obtain a large enough lump sum to pay for a major investment in the future. But both businesses and their potential investors need to keep an eye on the debt to capital ratio to avoid getting in too deep. Like individuals, businesses must have an active credit history to obtain debt capital.

Other Word Forms

Most of the financial capital analysis for businesses is done by closely analyzing the balance sheet. The capital assets of an individual or a business may include real estate, cars, investments (long or short-term), and other valuable possessions. A business may also have capital assets including expensive machinery, inventory, warehouse space, office equipment, and patents held by the company.

Why is ‘-ed’ sometimes pronounced at the end of a word?

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. Capital assets can also include factories, equipment, real estate, intellectual property, and human capital—anything of value that a business uses to generate returns. Typically, business capital and financial capital are judged from the perspective of a company’s capital structure.

Overall, capital is deployed to help shape a company’s development and growth. However, for financial and business purposes, capital is typically viewed from the perspective of current operations and investments in the future. Private and public equity will usually be structured in the form of shares of stock in the company.

Economists monitor several metrics of capital including personal income and personal consumption from the Department of Commerce’s personal income and outlays reports. Capital investment also can be found in the quarterly gross domestic product (GDP) report. Capital is frequently used to describe a city where a government is centered. More casually, a city or town might be a capital of some special importance. For example, New York City is sometimes called the “business capital of the world,” but Albany is the official state capital of New York. Many capital assets are illiquid—that is, they can’t be readily turned into cash to meet immediate needs.

While the terms wealth and capital are synonymous, you’ll find that wealth is used to describe a personal profit, while capital is used to describe funds that are set aside for investing. Capital can also be used in this way to describe something beyond money, such as political power. Debt financing represents a cash capital asset that must be repaid over time through scheduled liabilities. Equity financing, meaning the sale of stock shares, provides cash capital that is also reported in the equity portion of the balance sheet. Debt capital typically comes with lower rates of return and strict provisions for repayment.

A big brokerage firm like Charles Schwab or Fidelity Investments will allocate considerable trading capital to each of the professionals who trade stocks and other assets for it. Investors may attempt to add to their trading capital by employing a variety of trade optimization methods. These methods attempt to make the best use of capital by determining the ideal percentage of funds to invest with each trade.

Trading capital is the amount of money allotted to an individual or a firm to buy and sell various securities. Any business needs a substantial amount of capital to operate and create profitable returns. Balance sheet analysis is central to the review and assessment of business capital. At the national and global levels, financial capital is analyzed by economists to understand how it is influencing economic growth.

Companies have capital structures that define the mix of debt capital, equity capital, and working capital for daily expenditures that they use. Companies typically raise capital for their operations by selling ownership shares (equity capital) or by borrowing money(debt capital). A company’s capital structure is the amount of debt and equity that a company uses to fund its operations. Other private companies are responsible for assessing their capital thresholds, capital assets, and capital needs for corporate investment.

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. A company’s balance sheet provides for metric analysis of a capital structure, which is split among assets, liabilities, and equity. Most businesses distinguish between working capital, equity capital, and debt capital, although they overlap. A company that totaled up its capital value would include every item owned by the business as well as all of its financial assets (minus its liabilities).

Companies have capital structures that include debt capital, equity capital, and working capital for daily expenditures. Capital is an economic term for any asset used to produce profits for an investor. In the broadest sense, capital can be a measurement of wealth and a resource for increasing wealth.

Some of the key metrics for analyzing business capital are weighted average cost of capital, debt to equity, debt to capital, and return on equity. Capital assets can be found on either the current or long-term portion of the balance sheet. These assets may include cash, cash equivalents, and marketable securities as well as manufacturing equipment, production facilities, and storage facilities. Note that working capital is defined as current assets minus its current liabilities.