Loading the player...

What are 'Capital Flows'

Capital flows refer to the movement of money for the purpose of investment, trade or business production, including the flow of capital within corporations in the form of investment capital, capital spending on operations and research and development (R&D). On a larger scale, a government directs capital flows from tax receipts into programs and operations and through trade with other nations and currencies. Individual investors direct savings and investment capital into securities, such as stocks, bonds and mutual funds.

BREAKING DOWN 'Capital Flows'

Within the United States, the government and other organizations aggregate capital flows for the purpose of analysis, regulation and legislative efforts. Different sets of capital flows that are often studied, such as asset-class movements, venture capital, mutual fund flows, capital spending budgets and the federal budget.

Capital Flow Categories

Asset-class movements are measured as capital flows between cash, stocks, bonds and other financial instruments, while venture capital shifts in regards to investments being placed in startup businesses. Mutual fund flows track the net cash additions or withdrawals from broad classes of funds. Capital-spending budgets are examined at the corporate level to monitor growth plans, while federal budgets follow government spending plans.

Capital Flows and Investing

The relative strength or weakness of capital markets can be shown through applicable capital flows, especially in contained environments like the stock market or the federal budget. Investors also look at the growth rate of certain capital flows, such as venture capital and capital spending, to find any trends that might indicate future investment opportunities or risks.

Real Estate Capital Flows

As part of standard business operations, companies may look to purchase commercial real estate to house production activities. Additionally, many individuals see the purchase of real estate as an investment. As part of the financial crisis in 2008, capital flows to real estate investments slowed significantly, with sales failing to meet pre-crisis levels until 2013. As of 2015, U.S. capital flows saw an increase of approximately 45%, when compared to 2014, in regards to commercial property investment.

Volatility in Emerging Economies

In emerging economies, capital flows can be particularly volatile as the economy may experience periods of rapid growth and subsequent contraction. Increased capital inflows can lead to credit booms and the inflation of asset prices, which may be offset by losses due to depreciation of the currency based on exchange rates and declines in equity pricing.

In India, periods of fluctuation have been noted beginning in the 1990s. Capital flows during the earlier period, from the 1990s into the early 2000s, was marked by steady growth, transitioning to a rapid influx of funds between the early 2000s and 2007. This rapid growth eventually shifted, partially due to the implications of the financial crisis in 2008, leading to a high level of volatility regarding capital flows.

Example of Capital Flows

One of the biggest investing trends of the past several years involves the massive amounts of capital flow from active management into passive strategies such as exchange-traded funds (ETFs). For January 2018, $41.2 billion of investor capital flowed into U.S. equity passive funds, surpassing the $22.5 billion of inflows in December. Meanwhile, $24.1 billion in capital flowed out of active funds, compared to $16.3 billion in December. The path of capital flows also moved to other asset classes. For example, the taxable bond category proved the most popular in January, seeing $47.0 billion in inflows, with active and passive drawing almost equal capital. 

RELATED TERMS
  1. Capital Investment

    Capital investment refers to funds invested in a firm or enterprise ...
  2. Free Cash Flow Yield

    An overall return evaluation ratio of a stock, which standardizes ...
  3. Unconventional Cash Flow

    An unconventional cash flow is a series of inward and outward ...
  4. Initial Cash Flow

    Initial cash flow is the amount of money paid out or received ...
  5. Cash Flow

    Cash flow is the net amount of cash and cash-equivalents being ...
  6. Corporate Finance

    Corporate finance is the division of a company that deals with ...
Related Articles
  1. Investing

    Fundamental Case Study: Is Amazon's Cash Flow Actually Solid? (AMZN)

    Review Amazon's cash flow situation, including its free cash flow yield, operating cash flow from organic growth and cash flow from debt financing.
  2. Investing

    Evaluating A Statement Of Cash Flows

    The metrics for the Statement of Cash Flows is best viewed over time.
  3. Tech

    Cash Flow Is King: How to Keep it Running

    Why is cash flow so important, and what steps can a business take to improve it?
  4. Investing

    Trends in Capital Flows: Global Equities

    Review trends in global equity mutual fund flows between 2013 and 2015, and discover what those trends say about broader investor behavior.
  5. Investing

    Analyze cash flow the easy way

    Learn the key components of the cash flow statement, how to analyze and interpret changes in cash, and what improved free cash flow means to shareholders.
  6. Small Business

    Understanding Cash Flow

    Learn about the different types of cash flows and the importance for businesses to properly manage their cash flows.
  7. Investing

    Corporate cash flow: Understanding the essentials

    Tune out the accounting noise and see whether a company is generating the stuff it needs to sustain itself.
  8. Investing

    Cash flow statement: Analyzing cash flow from investing activities

    Here, you'll find an overview of cash flow from investing activities — one of three primary categories in the statement of cash flows.
  9. Investing

    Cash flow statement: Analyzing cash flow from financing activities

    The financing activity in the cash flow statement measures the flow of cash between a firm and its owners and creditors.
RELATED FAQS
  1. Free & operating cash flows: What's the Difference?

    Learn the difference between free cash flow and operating cash flow. Explore how analysts use earnings and cash flow to evaluate ... Read Answer >>
  2. How should I evaluate a company with negative cash flow investing activities?

    Understand how a negative cash flow from investing activities should be evaluated. Learn the sources and uses of cash in ... Read Answer >>
  3. What's the formula for calculating free cash flow?

    Free cash flow is the cash left over after a company pays for its operating expenses and capital expenditures. High free ... Read Answer >>
  4. 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 >>
  5. What is the difference between operating cash flow and net income?

    Learn how net income is an income statement for a certain period of time, while cash flow shows inflows and outflows based ... Read Answer >>
  6. What's the difference between Chaikin Money Flow (CMF) and Money Flow Index (MFI)?

    The similarities between Chaikin money flow and the money flow index end with the idea that they are both commonly used by ... Read Answer >>
Hot Definitions
  1. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  2. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  3. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  4. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  5. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  6. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
Trading Center