What is capital?

Capital is commonly defined as an organization’s financial resources, such as the value of its stocks, bonds, bank deposits, and material assets like buildings and equipment. Organizations with more capital are better equipped to generate wealth, and are therefore in a better financial position than organizations with less capital. In a financial sense, the ability to expend capital on labor is one of the key drivers of a company’s ability to generate revenue.

Deeper definition

The accumulation of capital amounts to an investment of a company’s profits back into the company. It can be expressed in different ways, such as money, rent and royalties, or even in assets that do not lend themselves to productivity, like art. But many businesses find the best return on their investment by putting capital into the means of production.

The means of production can only operate thanks to capital. When a farmer purchases a tractor, that becomes capital which grows his means of production and could make his agricultural business more profitable. This is just as true when a company buys another company, or upgrades its facilities.

Fixed capital is made up of long-term assets with a reusable value, such as a company’s office building or workstations. Working capital measures a company’s ability to meet obligations over the financial year. The former comprises expensive items with a particular function that are difficult to rapidly translate into cash, but the latter is more easy to convert into cash, making it an accessible source of funds for settling short-term obligations.

While capital is necessary to run a business, not all gains accumulate equally. When a more unequal distribution of capital occurs, the excess becomes wealth, and if allowed to balloon, it can make an increasingly smaller group of people richer at the expense of an increasingly larger group of people. When this happens, governments often try to make up the difference with a generous tax policy.

Capital doesn’t always have to refer to business. Social capital is one way of describing the relationship between production and personal relationships, whether in reference to goods and services or as a measurement of a person or product’s cultural value.

If you work out of your home, you could use some of your capital to repay a home equity loan. Use Bankrate’s home equity calculators to get a good rate.

Capital example

Fred’s business has had a profitable year, and he hopes to make the next one even more so. One way would be to reinvest some of that revenue into the business. He buys a new truck that can haul rocks at a faster rate, and hires Barney to drive it. While the purchase and the new hire expended some of Fred’s business’s capital, over time his business accumulates even more revenue.

Other Investing Terms

Holding period

Holding period is an investing term it pays to understand. Bankrate explains it.

Growth fund

Growth fund is an investment term it pays to understand. Bankrate explains it.

Discount brokerage

Discount brokerage is a term every investor should understand. Bankrate explains it.

Blend fund

A blend fund is a mix both value and growth stocks. Bankrate explains.

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