Capital

Loading the player...

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.

RELATED TERMS
  1. Capital Gains Tax

    A type of tax levied on capital gains incurred by individuals ...
  2. Capital Markets

    Capital markets are markets for buying and selling equity and ...
  3. Capital Formation

    A term used to describe net capital accumulation during an accounting ...
  4. Capital Gains Treatment

    The specific taxes assessed on investment capital gains as determined ...
  5. Capitalization

    1. In accounting, it is where costs to acquire an asset are included ...
  6. Capital Employed

    1. The total amount of capital used for the acquisition of profits. ...
Related Articles
  1. Economics

    Understanding Capital Assets

    A capital asset is one that a company plans on owning for more than one year, and uses in the production of revenue.
  2. Economics

    Understanding Capital Investment

    Capital investment is a term that describes a company’s expenditures for long-term assets used in the operation of its business.
  3. Economics

    What are Capital Goods?

    Capital goods are assets with a useful life of more than one year that are used for the production of income.
  4. Fundamental Analysis

    Explaining Capital Employed

    Generally, capital employed refers to all of the assets used in a business that contribute to the company’s ability to earn revenue.
  5. Economics

    What's Economic Capital?

    While regulatory and economic capital use some of the same measurements of risk to determine how much capital a firm should hold in reserve, economic capital uses more realistic measures.
  6. Economics

    Calculating Days Working Capital

    A company’s days working capital ratio shows how many days it takes to convert working capital into revenue.
  7. Investing

    What's Capitalization?

    Capitalization has different meanings depending on the context.
  8. Investing Basics

    Human Capital, An Important Asset For Portfolio Diversification

    An investor’s total wealth consists of two parts – financial capital and human capital. The latter should not be overlooked in investment strategies and portfolio management.
  9. Term

    How Equity Capital Markets Work

    An equity capital market is a market existing between companies and financial institutions that raises money for the companies.
  10. Investing Basics

    What is Capital Stock?

    Capital stock refers to the number of authorized shares a corporation may issue, both common and preferred.
RELATED FAQS
  1. How does total capital investment influence economic growth?

    Discover the basic relationship between capital investment and economic growth, and why improving the capital structure increases ... Read Answer >>
  2. What are typical forms of capital assets within a manufacturing company?

    Learn the typical forms of capital assets for a manufacturing company, such as land, buildings, equipment, goodwill and trademarks. Read Answer >>
  3. What types of capital are not considered share capital?

    Find out what types of capital are not considered share capital, including an explanation of the different types of share ... Read Answer >>
  4. What is the difference between capital investment decision and current asset decision?

    Learn how capital investment decisions are long-term funding decisions, while current asset decisions are short-term funding ... Read Answer >>
  5. What are some examples of different types of capital?

    Learn about the different types of capital, including financial, human and social capital, and how each is a valuable asset ... Read Answer >>
  6. What is the difference between capital gains and investment income?

    Learn about the difference between capital gains and other types of investment income, such as dividends paid on stock or ... Read Answer >>
Hot Definitions
  1. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  2. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  3. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  4. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  5. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  6. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
Trading Center