Capital

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What is 'Capital'

1. Financial assets or the financial value of assets, such as cash.
2. The factories, machinery and equipment owned by a business and used in production.

“Capital” can mean many things. Its specific definition depends on the context in which it is used. In general, it refers to financial resources available for use. Companies and societies with more capital are better off than those with less capital.

BREAKING DOWN 'Capital'

Capital is different from money. Money is used simply to purchase goods and services for consumption. Capital is more durable and is used to generate wealth through investment. Examples of capital include automobiles, patents, software and brand names. All of these things are inputs that can be used to create wealth. Besides being used in production, capital can be rented out for a monthly or annual fee to create wealth.

Capital itself does not exist until it is produced. Then, to create wealth, capital must be combined with labor, the work of individuals who exchange their time and skills for money. When people invest in capital by foregoing current consumption, they can enjoy greater future prosperity.

Capital has value because of property rights. Individuals or companies can claim ownership to their capital and use it as they please. They can also transfer ownership of their capital to another individual or corporation and keep the sale proceeds. Government regulations limit how capital can be used and diminish its value; the tradeoff is supposed to be some benefit to society. For example, when you sell a stock that has increased in value since you purchased it, you must pay tax on the capital gains. Those taxes are used for public purposes, such as national defense.

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