Financial capital - AbsoluteAstronomy.com

Financial capital can refer to money used by entrepreneur

Entrepreneur

An entrepreneur is an owner or manager of a business enterprise who makes money through risk and initiative.The term was originally a loanword from French and was first defined by the Irish-French economist Richard Cantillon. Entrepreneur in English is a term applied to a person who is willing to...

s and business

Business

A business is an organization engaged in the trade of goods, services, or both to consumers. Businesses are predominant in capitalist economies, where most of them are privately owned and administered to earn profit to increase the wealth of their owners. Businesses may also be not-for-profit...

es to buy what they need to make their products or provide their services or to that sector of the economy based on its operation, i.e. retail, corporate, investment banking

Investment banking

An investment bank is a financial institution that assists individuals, corporations and governments in raising capital by underwriting and/or acting as the client's agent in the issuance of securities...

, etc.

Financial capital vs. real capital

Financial capital or just capital in finance

Finance

"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...

and accounting, refers to the funds provided by lenders (and investors) to businesses to purchase real capital equipment for producing goods/services. Real Capital or Economic Capital comprises physical goods that assist in the production of other goods and services, e.g. shovels for gravediggers, sewing machines for tailors, or machinery and tooling for factories.

Financial capital generally refers to saved-up financial wealth, especially that used to start or maintain a business. A financial concept of capital is adopted by most entities in preparing their financial reports. Under a financial concept of capital, such as invested money or invested purchasing power, capital is synonymous with the net assets or equity of the entity. Under a physical concept of capital, such as operating capability, capital is regarded as the productive capacity of the entity based on, for example, units of output per day. Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power. There are thus three concepts of capital maintenance in terms of International Financial Reporting Standards

International Financial Reporting Standards

International Financial Reporting Standards are principles-based standards, interpretations and the framework adopted by the International Accounting Standards Board ....

(IFRS): (1) Physical capital maintenance (2) Financial capital maintenance in nominal monetary units (3) Financial capital maintenance in units of constant purchasing power.

Financial capital is provided by lenders for a price: interest

Interest

Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....

. Also see time value of money

Time value of money

The time value of money is the value of money figuring in a given amount of interest earned over a given amount of time. The time value of money is the central concept in finance theory....

for a more detailed description of how financial capital may be analyzed.

Furthermore, financial capital, is any liquid medium or mechanism that represents wealth

Wealth

Wealth is the abundance of valuable resources or material possessions. The word wealth is derived from the old English wela, which is from an Indo-European word stem...

, or other styles of capital

Capital (economics)

In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...

. It is, however, usually purchasing power in the form of money available for the production or purchasing of goods, etcetera. Capital can also be obtained by producing more than what is immediately required and saving the surplus.

Financial capital has been subcategorized by some academics as economic

Economic capital

-Finance and Economics:In financial services firms, economic capital can be thought of as the capital level shareholders would choose in absence of capital regulation....

or "productive capital" necessary for operations, signaling

Signalling (economics)

In economics, more precisely in contract theory, signalling is the idea that one party credibly conveys some information about itself to another party...

capital which signals a company's financial strength to shareholders, and regulatory capital which fulfills capital requirement

Capital requirement

Capital requirement refers to -The standardized requirements in place for banks and other depository institutions, which determines how much capital is required to be held for a certain level of assets through regulatory agencies such as the Bank for International Settlements, Federal Deposit...

Sources of capital

Long term - usually above 7 years
- Share Capital
  Share capital
  Share capital or issued capital or capital stock refers to the portion of a company's equity that has been obtained by trading stock to a shareholder for cash or an equivalent item of capital value...
- Mortgage loan
  Mortgage loan
  A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
- Retained Profit
- Venture Capital
  Venture capital
  Venture capital is financial capital provided to early-stage, high-potential, high risk, growth startup companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as...
- Debenture
  Debenture
  A debenture is a document that either creates a debt or acknowledges it. In corporate finance, the term is used for a medium- to long-term debt instrument used by large companies to borrow money. In some countries the term is used interchangeably with bond, loan stock or note...
- Project Finance
  Project finance
  Project finance is the long term financing of infrastructure and industrial projects based upon the projected cash flows of the project rather than the balance sheets of the project sponsors...

Medium term - usually between 2 and 7 years
- Term Loans
- Leasing
  Leasing
  Leasing is a process by which a firm can obtain the use of a certain fixed assets for which it must pay a series of contractual, periodic, tax deductible payments....
- Hire Purchase
  Hire purchase
  Hire purchase is the legal term for a contract, in this persons usually agree to pay for goods in parts or a percentage at a time. It was developed in the United Kingdom and can now be found in China, Japan, Malaysia, India, South Africa, Australia, Jamaica and New Zealand. It is also called...

Short term - usually under 2 years
- Bank Overdraft
  Overdraft
  An overdraft occurs when money is withdrawn from a bank account and the available balance goes below zero. In this situation the account is said to be "overdrawn". If there is a prior agreement with the account provider for an overdraft, and the amount overdrawn is within the authorized overdraft...
- Trade Credit
  Trade credit
  Trade credit is an arrangement between businesses to buy goods or services on account, that is, without making immediate cash payment. The supplier typically provides the customer with an agreement to bill them later, stipulating a fixed number of days or other date by which the customer should pay...
- Deferred Expenses
  Deferral
  Deferred, in accrual accounting, is any account where the asset or liability is not realized until a future date , e.g. annuities, charges, taxes, income, etc. The deferred item may be carried, dependent on type of deferral, as either an asset or liability...
- Factoring
  Factoring
  Factoring can refer to the following:* A form of commercial finance - see factoring ; structured settlement factoring transaction* Factorization, a mathematical concept* Factoring a design, as in code refactoring...

Capital market

Long-term funds are bought and sold:
- Shares
- Debentures
- Long-term loans, often with a mortgage bond as security
- Reserve funds
- Euro Bonds
- Law Firms

Money market

Financial institutions can use short-term savings to lend out in the form of short-term loans:
- Credit on open account
- Bank overdraft
- Short-term loans
- Bills of exchange
- Factoring of debtors

Differences between shares and debentures

Shareholders are effectively owners; debenture-holders are creditors.
Shareholders may vote at AGMs and be elected as directors; debenture-holders may not vote at AGMs or be elected as directors.
Shareholders receive profit in the form of dividends; debenture-holders receive a fixed rate of interest.
If there is no profit, the shareholder does not receive a dividend; interest is paid to debenture-holders regardless of whether or not a profit has been made.
In case of dissolution of firms debenture holders are paid first as compared to shareholder.

Fixed capital

This is money which is used to purchase assets that will remain permanently in the business and help it to make a profit.

Factors determining fixed capital requirements

Nature of business
Size of business
Stage of development
Capital invested by the owners
location of that area

Working capital

Working capital is that part of capital invested which is used for running the business such like money which is used to buy stock, pay expenses and finance credit.

Factors determining working capital requirements

Size of business
Stage of development
Time of production
Rate of stock turnover ratio
Buying and selling terms
Seasonal consumption
Seasonal product
profit level
growth and expansion
production cycle
general nature of business
business cycle

business policies

Instruments

A contract

Contract

A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...

regarding any combination of capital asset

Capital asset

The term capital asset has three unrelated technical definitions, and is also used in a variety of non-technical ways.*In financial economics, it refers to any asset used to make money, as opposed to assets used for personal enjoyment or consumption...

s is called a financial instrument, and may serve as a

medium of exchange
Medium of exchange
A medium of exchange is an intermediary used in trade to avoid the inconveniences of a pure barter system.By contrast, as William Stanley Jevons argued, in a barter system there must be a coincidence of wants before two people can trade – one must want exactly what the other has to offer, when and...

,
standard of deferred payment
Standard of deferred payment
A standard of deferred payment is the accepted way, in a given market, to settle a debt – a unit in which debts are denominated. It is one of the defining functions of money; for example, while the gold standard reigned, gold or any currency convertible to gold at a fixed rate constituted such a...

,
unit of account
Unit of account
A unit of account is a standard monetary unit of measurement of value/cost of goods, services, or assets. It is one of three well-known functions of money. It lends meaning to profits, losses, liability, or assets....

, or
store of value
Store of value
A recognized form of exchange can be a form of money or currency, a commodity like gold, or financial capital. To act as a store of value, these forms must be able to be saved and retrieved at a later time, and be predictably useful when retrieved....

.

Most indigenous forms of money (wampum, shells, tally sticks and such) and the modern fiat money

Fiat money

Fiat money is money that has value only because of government regulation or law. The term derives from the Latin fiat, meaning "let it be done", as such money is established by government decree. Where fiat money is used as currency, the term fiat currency is used.Fiat money originated in 11th...

is only a "symbolic" storage of value and not a real storage of value like commodity money.

Own and borrowed capital

Capital contributed by the owner or entrepreneur of a business, and obtained, for example, by means of savings or inheritance, is known as own capital or equity

Ownership equity

In accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid. If liability exceeds assets, negative equity exists...

, whereas that which is granted by another person or institution is called borrowed capital, and this must usually be paid back with interest. The ratio between debt and equity is named leverage

Leverage (finance)

In finance, leverage is a general term for any technique to multiply gains and losses. Common ways to attain leverage are borrowing money, buying fixed assets and using derivatives. Important examples are:* A public corporation may leverage its equity by borrowing money...

. It has to be optimized as a high leverage can bring a higher profit but create solvency

Solvency

Solvency, in finance or business, is the degree to which the current assets of an individual or entity exceed the current liabilities of that individual or entity. Solvency can also be described as the ability of a corporation to meet its long-term fixed expenses and to accomplish long-term...

risk.

Borrowed capital

This is capital which the business borrows from institutions or people, and includes debentures:

Redeemable debenture
Callable bond
A callable bond is a type of bond that allows the issuer of the bond to retain the privilege of redeeming the bond at some point before the bond reaches the date of maturity. In other words, on the call date, the issuer has the right, but not the obligation, to buy back the bonds from the bond...

s
Irredeemable debentures
Debentures to bearer
Ordinary debenture
Debenture
A debenture is a document that either creates a debt or acknowledges it. In corporate finance, the term is used for a medium- to long-term debt instrument used by large companies to borrow money. In some countries the term is used interchangeably with bond, loan stock or note...

s
bonds
deposits
loans

Own capital

This is capital that owners of a business (shareholders and partners, for example) provide:

Preference shares/hybrid source of finance
- Ordinary preference shares
- Cumulative preference shares
- Participating preference shares
Ordinary shares
Bonus shares
Founders' shares

These have preference over the equity shares. This means the payments made to the shareholders are first paid to the preference shareholder(s) and then to the equity shareholders.

Issuing and trading

Like money, financial instruments may be "backed" by state military fiat

Military fiat

Military fiat is a process whereby a decision is made and enforced by military means without the participation of other political elements. The Latin term fiat, translated as "let it be," suggests the autocratic attitude ascribed to such a process...

, credit

Credit (finance)

Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately , but instead arranges either to repay or return those resources at a later date. The resources provided may be financial Credit is the trust...

(i.e. social capital

Social capital

Social capital is a sociological concept, which refers to connections within and between social networks. The concept of social capital highlights the value of social relations and the role of cooperation and confidence to get collective or economic results. The term social capital is frequently...

held by banks and their depositors), or commodity

Commodity

In economics, a commodity is the generic term for any marketable item produced to satisfy wants or needs. Economic commodities comprise goods and services....

resources. Governments generally closely control the supply of it and usually require some "reserve" be held by institutions granting credit. Trading between various national currency

Currency

In economics, currency refers to a generally accepted medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply...

instruments is conducted on a money market

Money market

The money market is a component of the financial markets for assets involved in short-term borrowing and lending with original maturities of one year or shorter time frames. Trading in the money markets involves Treasury bills, commercial paper, bankers' acceptances, certificates of deposit,...

. Such trading reveals differences in probability of debt collection or store of value

Store of value

A recognized form of exchange can be a form of money or currency, a commodity like gold, or financial capital. To act as a store of value, these forms must be able to be saved and retrieved at a later time, and be predictably useful when retrieved....

function of that currency, as assigned by traders.

When in forms other than money, financial capital may be traded on bond market

Bond market

The bond market is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the Secondary market, usually in the form of bonds. The primary goal of the bond market is to provide a mechanism for long term funding of public and...

s or reinsurance markets

Reinsurance

Reinsurance is insurance that is purchased by an insurance company from another insurance company as a means of risk management...

with varying degrees of trust in the social capital

Social capital

(not just credits) of bond-issuers, insurers, and others who issue and trade in financial instruments. When payment is deferred on any such instrument, typically an interest rate is higher than the standard interest rates paid by banks, or charged by the central bank on its money. Often such instruments are called fixed-income instrument

Fixed income

Fixed income refers to any type of investment that is not equity, which obligates the borrower/issuer to make payments on a fixed schedule, even if the number of the payments may be variable....

s if they have reliable payment schedules associated with the uniform rate of interest. A variable-rate instrument, such as many consumer mortgages

Mortgage loan

A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...

, will reflect the standard rate for deferred payment set by the central bank

Central bank

A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...

prime rate

Prime rate

Prime rate or prime lending rate is a term applied in many countries to a reference interest rate used by banks. The term originally indicated the rate of interest at which banks lent to favored customers, i.e., those with high credibility, though this is no longer always the case...

, increasing it by some fixed percentage. Other instruments, such as citizen entitlements, e.g. "U.S. Social Security", or other pensions, may be indexed to the rate of inflation, to provide a reliable value stream.

Trading in stock markets or commodity markets

Commodity markets

Commodity markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodities exchanges, in which they are bought and sold in standardized contracts....

is actually trade in underlying assets which are not wholly financial in themselves, although they often move up and down in value in direct response to the trading in more purely financial derivatives

Financial instruments

A financial instrument is a tradable asset of any kind, either cash; evidence of an ownership interest in an entity; or a contractual right to receive, or deliver, cash or another financial instrument....

. Typically commodity markets depend on politics that affect international trade, e.g. boycotts and embargoes, or factors that influence natural capital

Natural capital

Natural capital is the extension of the economic notion of capital to goods and services relating to the natural environment. Natural capital is thus the stock of natural ecosystems that yields a flow of valuable ecosystem goods or services into the future...

, e.g. weather that affects food crops. Meanwhile, stock markets are more influenced by trust in corporate leaders, i.e. individual capital

Individual capital

Individual capital, also known as human capital, comprises inalienable or personal traits of persons, tied to their bodies and available only through their own free will, such as skill, creativity, enterprise, courage, capacity for moral example, non-communicable wisdom, invention or empathy,...

, by consumers, i.e. social capital

Social capital

or "brand capital" (in some analyses), and internal organizational efficiency, i.e. instructional capital

Instructional capital

Instructional capital is a term used in educational administration after the 1960s, to reflect capital resulting from investment in producing learning materials....

and infrastructural capital

Infrastructural capital

Public capital is the aggregate body of government-owned assets that are used as the means for private productivity. Such assets span a wide range including: large components such as highways, airports, roads, transit systems, and railways; local, municipal components such as public education,...

. Some enterprises issue instruments to specifically track one limited division or brand. "Financial future

Financial future

A financial future is a futures contract on a short term interest rate . Contracts vary, but are often defined on an interest rate index such as 3-month sterling or US dollar LIBOR....

s", "Short selling

Short selling

In finance, short selling is the practice of selling assets, usually securities, that have been borrowed from a third party with the intention of buying identical assets back at a later date to return to that third party...

" and "financial option

Option (finance)

In finance, an option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price. The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the...

s" apply to these markets, and are typically pure financial bets on outcomes, rather than being a direct representation of any underlying asset.

Broadening the notion

The relationship between financial capital, money

Money

Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past,...

, and all other styles of capital

Capital (economics)

, especially human capital

Human capital

Human capitalis the stock of competencies, knowledge and personality attributes embodied in the ability to perform labor so as to produce economic value. It is the attributes gained by a worker through education and experience...

or labor, is assumed in central bank

Central bank

policy and regulations regarding instruments as above.

Such relationships and policies are characterized by a political economy

Political economy

Political economy originally was the term for studying production, buying, and selling, and their relations with law, custom, and government, as well as with the distribution of national income and wealth, including through the budget process. Political economy originated in moral philosophy...

- feudalist, socialist, capitalist

Capitalism

Capitalism is an economic system that became dominant in the Western world following the demise of feudalism. There is no consensus on the precise definition nor on how the term should be used as a historical category...

, green

Green politics

Green politics is a political ideology that aims for the creation of an ecologically sustainable society rooted in environmentalism, social liberalism, and grassroots democracy...

, anarchist or otherwise. In effect, the means of money supply

Money supply

In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits .Money supply data are recorded and published, usually...

and other regulations on financial capital represent the economic sense of the value system of the society itself, as they determine the allocation of labor in that society.

So, for instance, rules for increasing or reducing the money supply based on perceived inflation, or on measuring well-being, reflect some such values

Theory of value (economics)

"Theory of value" is a generic term which encompasses all the theories within economics that attempt to explain the exchange value or price of goods and services...

, reflect the importance of using (all forms of) financial capital as a stable store of value. If this is very important, inflation control is key - any amount of money inflation reduces the value of financial capital with respect to all other types.

If, however, the medium of exchange function is more critical, new money may be more freely issued regardless of impact on either inflation or well-being.

Marxian perspectives

It is common in Marxist theory to refer to the role of "Finance Capital

Finance capitalism

Finance capitalism is a term in Marxian political economics defined as the subordination of processes of production to the accumulation of money profits in a financial system. It is characterized by the pursuit of profit from the purchase and sale of, or investment in, currencies and financial...

" as the determining and ruling class interest in capitalist society, particularly in the latter stages.

Valuation

Normally, a financial instrument is priced accordingly to the perception by capital market players of its expected return and risk.

Unit of account functions may come into question if valuations of complex financial instruments vary drastically based on timing. The "book value

Book value

In accounting, book value or carrying value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization or Impairment costs made against the asset. Traditionally, a company's book value...

", "mark-to-market" and "mark-to-future" conventions are three different approaches to reconciling financial capital value units of account.

Economic role

Socialism

Socialism is an economic system characterized by social ownership of the means of production and cooperative management of the economy; or a political philosophy advocating such a system. "Social ownership" may refer to any one of, or a combination of, the following: cooperative enterprises,...

, capitalism

Capitalism

, feudalism

Feudalism

Feudalism was a set of legal and military customs in medieval Europe that flourished between the 9th and 15th centuries, which, broadly defined, was a system for ordering society around relationships derived from the holding of land in exchange for service or labour.Although derived from the...

, anarchism

Anarchism

Anarchism is generally defined as the political philosophy which holds the state to be undesirable, unnecessary, and harmful, or alternatively as opposing authority in the conduct of human relations...

, other civic theories

Civics

Civics is the study of rights and duties of citizenship. In other words, it is the study of government with attention to the role of citizens ― as opposed to external factors ― in the operation and oversight of government....

take markedly different views of the role of financial capital in social life, and propose various political restrictions to deal with that.

Finance capitalism is the production of profit from the manipulation of financial capital. It is held in contrast to industrial capitalism, where profit is made from the manufacture of goods.

Financial capital vs. real capital

Sources of capital

Capital market

Money market

Differences between shares and debentures

Fixed capital

Factors determining fixed capital requirements

Working capital

Factors determining working capital requirements

Instruments

Own and borrowed capital

Borrowed capital

Own capital

Issuing and trading

Broadening the notion

Marxian perspectives

Valuation

Economic role

See also