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 make 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 purchase of land or equipment or 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.

  1. What does a positive capital account balance mean?

    Learn about a capital account, the four categories of transactions that comprise it and the meaning of a positive capital ... Read Answer >>
  2. What's the difference between the current account and the capital account?

    The current account considers goods and services currently being produced. The capital account is concerned with payments ... Read Answer >>
  3. How does a nation's balance of payments affect its capital stock?

    Find out how changes in a country's balance of payments can reflect changes in the capital stock of that nation's businesses ... Read Answer >>
  4. What transactions are included in a country's balance of payments?

    Learn about the many types of transactions that are recorded in a country's balance of payments, including the current, capital ... Read Answer >>
Related Articles
  1. Insights

    What Is The Balance Of Payments?

    The balance of payments helps countries to track how much money is coming in and how much money is going out.
  2. Personal Finance

    Current Account Deficits: Government Investment or Irresponsibility?

    Deficit can be a sign of trouble for some countries, and of health for others. Find out what it means when more funds are exiting than entering a nation.
  3. Insights

    The Balance Of Trade

    The balance of trade is the difference between a country’s imports and exports. A trade deficit occurs when a country buys or imports more goods from other countries than it sells or exports. ...
  4. Trading

    Main Factors that Influence Exchange Rates

    The exchange rate is one of the most important determinants of a country's relative level of economic health and can impact your returns.
  5. Investing

    What's the Balance of Trade?

    The balance of trade is the difference between the value of all the goods and services a country exports and the goods and services it imports.
  6. Insights

    5 Economic Effects Of Country Liberalization

    Liberalization of countries in emerging markets provides new opportunities for investors to increase their diversification and profit.
  7. Retirement

    Things to Consider Before Retiring Abroad

    While moving abroad can stretch your retirement dollars, it can also make handling finances harder.
  8. Insights

    A Look Into Foreign Direct Investment Trends

    Foreign direct investments play an important role as an indicator of a healthy economy in terms of economic growth and long-term capital movement.
  9. Investing

    Investing Beyond Your Borders

    Investing abroad poses risks, but can also help you diversify. Discover ways to invest in foreign stocks.
  10. Investing

    Broadening Your Portfolio's Borders

    Find out what type of international fund might suit your needs in gaining exposure to foreign markets.
  1. Balance of Payments (BOP)

    The balance of payments is a statement of all transactions made ...
  2. Official Settlement Account

    An official settlement account is an account used to keep track ...
  3. Trade Deficit

    A trade deficit occurs a country's imports exceeds its exports. ...
  4. Account Balance

    1. The amount of money in a financial repository, such as a checking ...
  5. Foreign Debt

    Foreign debt is an outstanding loan that one country owes to ...
  6. Current Account Surplus

    A current account surplus is a positive current account balance, ...
Hot Definitions
  1. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  2. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  3. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  4. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  5. Leverage Ratio

    A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt, or ...
  6. Annuity

    An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income ...
Trading Center