Financial capital (also simply known as capital or equity in

finance Finance refers to monetary resources and to the study and Academic discipline, discipline of money, currency, assets and Liability (financial accounting), liabilities. As a subject of study, is a field of Business administration, Business Admin ...

accounting Accounting, also known as accountancy, is the process of recording and processing information about economic entity, economic entities, such as businesses and corporations. Accounting measures the results of an organization's economic activit ...

and

economics Economics () is a behavioral science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and interac ...

) 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: m ...

used by

entrepreneur Entrepreneurship is the creation or extraction of economic value in ways that generally entail beyond the minimal amount of risk (assumed by a traditional business), and potentially involving values besides simply economic ones. An entreprene ...

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 ...

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 is an advisory-based financial service for institutional investors, corporations, governments, and similar clients. Traditionally associated with corporate finance, such a bank might assist in raising financial capital by und ...

). 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 in time, such as at the end of the reporting period. At the end of that per ...

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 (profit) or to gain an advantage (interest). Through this allocated capital the investor usually purchases some species of property. Types of in ...

) to businesses in order to purchase real capital equipment or services for producing new

goods or services Goods are items that are usually (but not always) tangible, such as pens or apples. Services are activities provided by other people, such as teachers or barbers. Taken together, it is the production, distribution, and consumption of goods ...

. In contrast, real 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 valuable financial assets or physical possessions which can be converted into a form that can be used for transactions. This includes the core meaning as held in the originating Old English word , which is from an ...

, 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 Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form which is easy to un ...

. Under a financial concept of capital, such as ''invested money'' or ''invested purchasing power'', capital is synonymous with the

net assets Net worth is the value of all the non-financial and financial assets owned by an individual or institution minus the value of all its outstanding liabilities. Financial assets minus outstanding liabilities equal net financial assets, so net w ...

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 pr ...

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 fi ...

(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 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 distinct f ...

. Also see

time value of money The time value of money refers to the fact that there is normally a greater benefit to receiving a sum of money now rather than an identical sum later. It may be seen as an implication of the later-developed concept of time preference. The time ...

for a more detailed description of how financial capital may be analyzed. Furthermore, financial capital, is any liquid medium or mechanism that represents

, or other styles of

capital Capital and its variations may refer to: Common uses * Capital city, a municipality of primary status ** Capital region, a metropolitan region containing the capital ** List of national capitals * Capital letter, an upper-case letter Econom ...

. 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 (economics), production, Distribution (economics), distribution and trade, as well as Consumption (economics), consumption of Goods (economics), goods and Service (economics), services. In general, it is ...

or "

productive capital In political philosophy, the means of production refers to the generally necessary assets and resources that enable a society to engage in production. While the exact resources encompassed in the term may vary, it is widely agreed to include the ...

" 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 or other financial institution has to have as required by its financial regulator. This is usually expressed as a capital ...

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 equity that has been derived by the issue of shares in the corporation to a shareholder, usually for cash. ''Share ...

Mortgage loan A mortgage loan or simply mortgage (), in civil law (legal system), civil law jurisdictions 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 t ...

** Retained Profit **

Venture capital Venture capital (VC) is a form of private equity financing provided by firms or funds to start-up company, startup, early-stage, and emerging companies, that have been deemed to have high growth potential or that have demonstrated high growth in ...

Debenture In corporate finance, a debenture is a medium- to long-term debt 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 creates a debt or acknowle ...

Project finance Project finance is the long-term financing of infrastructure and industrial projects based upon the projected cash flows of the project rather than the balance sheets of its sponsors. Usually, a project financing structure involves a number of eq ...

* Medium term – usually between 2 and 7 years ** Term Loans **

Revenue-based financing Revenue-based financing (also known as royalty financing or royalty-based financing) is a type of financial capital provided to growing businesses in which investors inject capital (sometimes called an ''advance'') into a business in return for a f ...

Leasing A lease is a contractual arrangement calling for the user (referred to as the ''lessee'') to pay the owner (referred to as the ''lessor'') for the use of an asset. Property, buildings and vehicles are common assets that are leased. Industrial ...

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 services are bought on credit. Trade credit facilitates the purchase of supplies without immediate payment. Trade credit is commonly used by business organizations as a ...

** Deferred Expenses ** Factoring

Capital market

* Long-term funds are bought and sold: ** Shares **

** 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 usually less than 270 days. In layperson terms, it is like an "IOU" but can be bought and sold becaus ...

** Credit on open account ** Bank overdraft ** Short-term loans **

Bills of exchange A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time, whose payer is usually named on the document. More specifically, it is a document contemplated by or consisting of a ...

** Factoring of debtors

Differences between shares and debentures

Shareholders A shareholder (in the United States often referred to as stockholder) of corporate stock refers to an individual or legal entity (such as another corporation, a body politic, a 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 via debt instruments 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 or business, is the degree to which the current assets of an individual or entity exceed the current liabilities of that individual or entity. Solvency can also be described as the ability of a corporation to meet its long- ...

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 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 creates a debt or acknowle ...

s * bonds * deposits *loans Own capital is private capital that owners of a business (shareholders and partners, for example) provide, sometimes called owners equity. The ownership interest is typically represented in preferred

shares In financial markets, a share (sometimes referred to as stock or equity) is a unit of equity ownership in the capital stock of a corporation. It can refer to units of mutual funds, limited partnerships, and real estate investment trusts. Sha ...

, and may be of various types, for example: * Preference shares/hybrid source of finance ** Ordinary preference shares ** Cumulative preference shares ** Participating preference shares * Ordinary shares * Bonus shares * Founders' shares These typically have preference over the

common share Common stock is a form of corporate equity ownership, a type of security. The terms voting share and ordinary share are also used frequently outside of the United States. They are known as equity shares or ordinary shares in the UK and other Com ...

s. This means the payments made to the shareholders are first paid to the preference shareholder(s) and then to the equity shareholders.

Instruments

contract A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more parties. A contract typically involves consent to transfer of goods, services, money, or promise to transfer any of thos ...

regarding any combination of

capital asset A capital asset is defined as property of any kind held by an assessee. It need not be connected to the assesse’s business or profession. The term encompasses all kinds of property, movable or immovable, tangible or intangible, fixed or circula ...

s is called a

financial instrument Financial instruments are monetary 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 the form ...

, 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. Most forms of money are categorised as mediums of exchange, i ...

, *

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, thereby allowing goods and services to be acquired now and paid for in the future. The 19th-century economist ...

, *

unit of account In economics, unit of account is one of the functions of money. 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 ...

, 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 is a type of government-issued currency that is not backed by a precious metal, such as gold or silver, nor by any other tangible asset or commodity. Fiat currency is typically designated by the issuing government to be legal tende ...

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 (or carrying value) is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization or impairment costs made ...

", "

mark-to-market Mark-to-market (MTM or M2M) or fair value accounting is accounting for the "fair value" of an asset or liability based on the current market price, or the price for similar assets and liabilities, or based on another objectively assessed "fair" ...

" 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 Military fiat is a process whereby a decision is made and enforced by military means without the participation of other political elements. The Latin term ''fiat'', translated as "let it be," suggests the autocratic attitude ascribed to such a proc ...

credit Credit (from Latin verb ''credit'', meaning "one believes") is the trust which allows one party to provide money or resources to another party wherein the second party does not reimburse the first party immediately (thereby generating a debt) ...

(i.e.

social capital Social capital is a concept used in sociology and economics to define networks of relationships which are productive towards advancing the goals of individuals and groups. It involves the effective functioning of social groups through interper ...

held by banks and their depositors), or precious metals 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 is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins. A more general definition is that a currency is a ''system of money'' in common use within a specific envi ...

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 short-term securities became a commodity, the money market became a compo ...

. Such trading reveals differences in probability of

debt collection Debt collection or cash collection is the process of pursuing payments of money or other agreed-upon value owed to a creditor. The debtors may be individuals or businesses. An organization that specializes in debt collection is known as a coll ...

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 in which 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 ...

s or reinsurance markets with varying degrees of trust in the

(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, national bank, or monetary authority is an institution that manages the monetary policy of a country or monetary union. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the mo ...

prime rate The prime rate or prime lending rate is an interest rate used by banks, typically representing the rate at which they lend to their most creditworthy customers. Some variable interest rates may be expressed as a percentage above or below prime ra ...

, increasing it by some fixed percentage. Other instruments, such as

citizen entitlement Citizenship is a membership and allegiance to a sovereign state. Though citizenship is often conflated with nationality in today's English-speaking world, international law does not usually use the term ''citizenship'' to refer to nationality; ...

s, e.g. " U.S. Social Security", or other pensions, may be indexed to the rate of inflation, to provide a reliable value stream. 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, the economic view of talent, comprises inalienable or personal traits of persons, tied to their bodies and available only through their own free will, such as skill, creativity, enterprise, courage, capacity for moral example ...

, by consumers, i.e.

or "brand capital" (in some analyses), and internal organizational efficiency, i.e. instructional capital 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 ass ...

. Some enterprises issue instruments to specifically track one limited division or brand. "

Financial future In finance, a futures contract (sometimes called futures) is a standardized legal contract to buy or sell something at a predetermined price for delivery at a specified time in the future, between parties not yet known to each other. The item tr ...

s", "

Short selling In finance, being short in an asset means investing in such a way that the investor will profit if the market value of the asset falls. This is the opposite of the more common Long (finance), long Position (finance), position, where the inves ...

" 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,

, and all other styles of

, especially

human capital Human capital or human assets is a concept used by economists to designate personal attributes considered useful in the production process. It encompasses employee knowledge, skills, know-how, good health, and education. Human capital has a subs ...

labor Labour or labor may refer to: * Childbirth, the delivery of a baby * Labour (human activity), or work ** Manual labour, physical work ** Wage labour, a socioeconomic relationship between a worker and an employer ** Organized labour and the labour ...

, is assumed in

policy and regulations regarding instruments as above. Such relationships and policies are characterized by a

political economy Political or comparative economy is a branch of political science and economics studying economic systems (e.g. Marketplace, markets and national economies) and their governance by political systems (e.g. law, institutions, and government). Wi ...

–

feudalist Feudalism, also known as the feudal system, was a combination of legal, economic, military, cultural, and political customs that flourished in medieval Europe from the 9th to 15th centuries. Broadly defined, it was a way of structuring societ ...

socialist Socialism is an economic ideology, economic and political philosophy encompassing diverse Economic system, economic and social systems characterised by social ownership of the means of production, as opposed to private ownership. It describes ...

capitalist Capitalism is an economic system based on the private ownership of the means of production and their use for the purpose of obtaining profit. This socioeconomic system has developed historically through several stages and is defined by ...

green Green is the color between cyan and yellow on the visible spectrum. It is evoked by light which has a dominant wavelength of roughly 495570 nm. In subtractive color systems, used in painting and color printing, it is created by a com ...

anarchist Anarchism is a political philosophy and Political movement, movement that seeks to abolish all institutions that perpetuate authority, coercion, or Social hierarchy, hierarchy, primarily targeting the state (polity), state and capitalism. A ...

or otherwise. In effect, the means of

money supply In macroeconomics, money supply (or money stock) refers to the total volume of money held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circulation (i ...

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 average price of goods and services in terms of money. This increase is measured using a price index, typically a consumer price index (CPI). When the general price level rises, each unit of curre ...

, or on

measuring well-being Quality of life (QOL) is defined by the World Health Organization as "an individual's perception of their position in life in the context of the culture and value systems in which they live and in relation to their goals, expectations, standards ...

, reflect some such

values In ethics and social sciences, value denotes the degree of importance of some thing or action, with the aim of determining which actions are best to do or what way is best to live ( normative ethics), or to describe the significance of different a ...

, 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 an economic ideology, economic and political philosophy encompassing diverse Economic system, economic and social systems characterised by social ownership of the means of production, as opposed to private ownership. It describes ...

capitalism Capitalism is an economic system based on the private ownership of the means of production and their use for the purpose of obtaining profit. This socioeconomic system has developed historically through several stages and is defined by ...

feudalism Feudalism, also known as the feudal system, was a combination of legal, economic, military, cultural, and political customs that flourished in Middle Ages, medieval Europe from the 9th to 15th centuries. Broadly defined, it was a way of struc ...

anarchism Anarchism is a political philosophy and Political movement, movement that seeks to abolish all institutions that perpetuate authority, coercion, or Social hierarchy, hierarchy, primarily targeting the state (polity), state and capitalism. A ...

, 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 Capitalism is an economic system based on the private ownership of the means of production. This is generally taken to imply the moral permissibility of profit, free trade, capital accumulation, voluntary exchange, wage labor, etc. Its emergence ...

, where profit is made from the manufacture of goods.

Marxist perspectives

It is common in

Marxist Marxism is a political philosophy and method of socioeconomic analysis. It uses a dialectical and materialist interpretation of historical development, better known as historical materialism, to analyse class relations, social conflic ...

theory to refer to the role of finance capital as the determining and ruling class interest in capitalist society, particularly in the latter stages.

References

Sources

Difference between Shares and Debentures