A negative capital account balance indicates a predominant money flow outbound from a country to other countries. The implication of a negative capital account balance is that ownership of assets in foreign countries is increasing. Together, the capital account also referred to as the financial account, and the current account makes up a country's balance of payments. A deficit in the capital account is balanced by a surplus in the current account, which records inbound money flow to a country. Transactions affecting a country's balance of payments include corporate, individual and government dealings.
Some of the transactions that impact the capital account include debt forgiveness, purchase of assets, transfers of financial assets by immigrants, inheritance taxes and royalties. Capital account transactions are usually classified by one of the following four categories: foreign direct investment, or FDI; portfolio investments; other investments; and the reserve account.
Foreign direct investment refers to direct capital investments in a foreign country. These can include the purchase of land or equipment or the purchase of controlling interest in a business. Foreigners making direct investments in a country add to that country's capital account, although later profits generated from the investment, those not reinvested in the country, are a capital outflow from the country. These decrease the capital account balance and add to the current account balance.
Portfolio investment in this context refers to foreigners buying securities in the form of stock shares or government or corporate bonds. Opportunities for investors in emerging market economies have led to an increase in foreign portfolio investment, aided by the availability of investment instruments such as exchange-traded funds, or ETFs.
The other investment category includes loans and short-term transfers of capital to foreign banks, since these result in profits through earned interest. Reserve account transactions are handled by a country's central bank, involving currency exchange, the buying or selling of a country's currency necessary to transact business. Substantial foreign investment flows of capital, either inbound or outbound, can impact the value of a country's currency. Because of this fact, many countries regulate capital and current account flows.