Capital Allocation

Loading the player...

What is 'Capital Allocation'

Capital allocation is a process of how businesses divide their financial resources and other sources of capital to different processes, people and projects. Overall, it is management's goal to optimize capital allocation so that it generates as much wealth as possible for its shareholders.

BREAKING DOWN 'Capital Allocation'

The process behind making a capital allocation decision is complex, as management virtually has an unlimited number of options to consider.

For example, if a company ends up with a larger than expected windfall at the end of the year, management needs to decide whether to use the extra funds to buy back stock, issue a special dividend, purchase new equipment or increase the research and development budget. In one way or another, each one of these actions will likely benefit the shareholder, but the difficult part is in determining how much money should be allocated to each action in order to yield the most benefit.

RELATED TERMS
  1. Capitalization Of Profits

    Converting a company's retained earnings, which represent the ...
  2. Strategic Asset Allocation

    A portfolio strategy that involves setting target allocations ...
  3. Allocational Efficiency

    A characteristic of an efficient market in which capital is allocated ...
  4. Capital

    1) Financial assets or the financial value of assets, such as ...
  5. Efficiency Principle

    An economic theory that states that the greatest benefit to society ...
  6. Tactical Asset Allocation - TAA

    An active management portfolio strategy that rebalances the percentage ...
Related Articles
  1. Markets

    Understanding Capital

    Capital has a variety of meanings, but it generally refers to financial resources.
  2. ETFs & Mutual Funds

    CAIBX: American Funds Capital Income Builder Trends in 2016

    Learn about the composition of the American Funds Capital Income Builder fund, and discover how its makeup has evolved between March 2015 and March 2016.
  3. Trading

    6 Asset Allocation Strategies That Work

    Your portfolio's asset mix is a key factor in whether it's profitable. Find out how to get this delicate balance right.
  4. Managing Wealth

    5 Things To Know About Asset Allocation

    Overwhelmed by investment options? Learn how to create an asset allocation strategy that works for you.
  5. Managing Wealth

    Choose Your Own Asset Allocation Adventure

    There are many strategies to help balance your portfolio. Here are a few to get you started.
  6. Managing Wealth

    Strategic Asset Allocation

    Strategic asset allocation is a portfolio strategy that involves setting target allocations for various asset classes, then periodically rebalancing the portfolio back to the original allocations ...
  7. ETFs & Mutual Funds

    Asset Allocation Models: Comparing 3 Traditional Strategies

    Learn about the three most common asset allocation models: conservative, moderate and aggressive.
  8. Managing Wealth

    The 401(k) Emergency Boomers Need to Address Now

    The asset allocations of Baby Boomers’ 401(k)s are dangerously out of balance. Here's how to remedy that.
  9. ETFs & Mutual Funds

    FDGRX: Fidelity Growth Company Fund Portfolio Trends in 2016

    Evaluate the composition of the Fidelity Growth Company Fund, and learn how the fund's makeup has evolved between March 2015 and March 2016.
  10. Managing Wealth

    5 Tips to Increase the Performance Of Your Portfolio

    Discover helpful steps an investor can easily take to improve the performance of his investment portfolio by maximizing gains and minimizing losses.
RELATED FAQS
  1. How can I use asset allocation to properly diversify my portfolio?

    Understand how asset allocation works, and learn how you can use asset allocation to diversify your investment portfolio ... Read Answer >>
  2. What role do shareholders play in a capital budget?

    Learn about why shareholders play an integral role in capital budgeting and how it benefits businesses to use equity capital ... Read Answer >>
  3. What is the difference between financial capital and economic capital?

    Read about the differences between types of financial capital, which companies use to raise money, and economic capital models ... Read Answer >>
  4. 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 >>
  5. How is working capital different from fixed capital?

    Understand the differences between working capital and fixed capital, including definitions and examples of how businesses ... Read Answer >>
  6. 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 >>
Hot Definitions
  1. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  2. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  3. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  4. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  5. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  6. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
Trading Center