What is Capital?

Capital refers to financial assets as well as physical factors of production such as manufacturing equipment.

Capital may include funds within your deposit account, buildings, machinery. Raw materials that are used in production are not capital.

In order for an asset to be considered 'capital' it needs to provide an ongoing benefit for a business - long-term wealth creation. Capital in conjunction with labor, turns raw materials into products or services that will later be sold for a profit.

There are a few types of capital that a business may utilize. Here is the breakdown of each type.

Types of capital

Equity capital

Equity capital is incurred through investment - that does not need to be repaid. This may include investment made by owners, or through sale of stocks.

Debt capital

Debt capital is subject to being repaid on negotiated terms. Debt capital is obtained by incurring debt from friends or family members, financial institutions, government business loans, etc. Essentially this is a loan acquired from a private source.

Trading capital

This is the amount of money that is stowed away to be used to trade various securities - money used for investments.

Working capital

It's the difference between the company's current assets and liabilities. This helps assess the short-term liquidity of the company.