Financial capital

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For a city with an important role in the world economy, see Financial
centre and Global city.
Not to be confused with Capital (economics).

Capital exports in 2006

Capital imports in 2006

Financial capital is any economic resource measured in terms of money
used by entrepreneurs and businesses to buy what they need to make
their products or to provide their services to the sector of the economy
upon which their operation is based, i.e. retail, corporate, investment
banking, etc.

Contents [hide]
1 Three concepts of capital maintenance authorized in IFRS
2 Sources of capital
2.1 Capital market
2.2 Money market
3 Differences between shares and debentures
4 Fixed capital
4.1 Factors determining fixed capital requirements
5 Working capital
5.1 Factors determining working capital requirements
6 Instruments
7 Own and borrowed capital
7.1 Borrowed capital
7.2 Own capital
8 Issuing and trading
9 Broadening the notion
10 Marxist perspectives
11 Valuation
12 Economic role
13 See also
14 References
15 Further reading
Three concepts of capital maintenance authorized in IFRS[edit]
Financial capital or just capital/equity in finance, accounting and
economics, is internal retained earnings generated by the entity or funds
provided by lenders (and investors) to businesses to purchase real capital
equipment or services for producing new 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.[1][2] There are thus three concepts of
capital maintenance in terms of International Financial Reporting
Standards (IFRS): (1) Physical capital maintenance (2) Financial capital
maintenance in nominal monetary units (3) Financial capital maintenance
in units of constant purchasing power.[1][3] Framework for the Preparation
and Presentation of Financial Statements,

Financial capital is provided by lenders for a price: interest. Also see time
value of money for a more detailed description of how financial capital
may be analyzed.

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

represents wealth, or other styles of capital. 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 can also be in the form of purchasable items such as
computers or books that can contribute directly or indirectly to obtaining
various other types of capital.[4]

Financial capital has been subcategorized by some academics as

economic or "productive capital" necessary for operations, signaling
capital which signals a company's financial strength to shareholders, and
regulatory capital which fulfills capital requirements.[5]

Sources of capital[edit]
Long term usually above 7 years
Share Capital
Mortgage loan
Retained Profit
Venture capital
Debenture
Project Finance
Medium term usually between 2 and 7 years
Term Loans
Leasing
Hire Purchase
Short term usually under 2 years
Bank Overdraft
Trade Credit
Deferred Expenses
Factoring
Capital market[edit]
Long-term funds are bought and sold:
Shares
Debenture
Long-term loans, often with a mortgage bond as security
Reserve funds
Euro Bonds
Money market[edit]
Financial institutions can use short-term savings to lend out in the form of
short-term loans:
Commercial paper
Credit on open account
Bank overdraft
Short-term loans
Bills of exchange
Factoring of debtors
Differences between shares and debentures[edit]
Shareholders are effectively owners; debenture-holders are creditors.
Shareholders may vote at AGMs (Annual General Meetings, alternatively
Annual Shareholder Meetings) 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 the firm's debenture holders are paid first, before
shareholders.
Fixed capital[edit]
Fixed capital is money firms use to purchase assets that will remain
permanently in the business and help it make a profit.

Factors determining fixed capital requirements[edit]

Nature of business
Size of business
Stage of development
Capital invested by the owners
location of that area
Working capital[edit]
Firms use working capital to run their business. For example, money that
they use to buy stock, pay expenses and finance credit.

Factors determining working capital requirements[edit]

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

Debt ratio
Instruments[edit]
A contract regarding any combination of capital assets is called a financial
instrument, and may serve as a

medium of exchange,
standard of deferred payment,
unit of account, or
store of value.
Most indigenous forms of money (wampum, shells, tally sticks and such)
and the modern fiat money are only a "symbolic" storage of value and not
a real storage of value like commodity money.
Own and borrowed capital[edit]
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, 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. It has
to be optimized as a high leverage can bring a higher profit but create
solvency risk.

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

Redeemable debentures
Irredeemable debentures
Debentures to bearer
Ordinary debentures
bonds
deposits
loans
Own capital[edit]
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[edit]
Like money, financial instruments may be "backed" by state military fiat,
credit (i.e. social capital held by banks and their depositors), or
commodity 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 instruments is
conducted on a money market. Such trading reveals differences in
probability of debt collection or store of value function of that currency, as
assigned by traders.

When in forms other than money, financial capital may be traded on bond
markets or reinsurance markets with varying degrees of trust in the 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 instruments if they have reliable
payment schedules associated with the uniform rate of interest. A
variable-rate instrument, such as many consumer mortgages, will reflect
the standard rate for deferred payment set by the central bank prime
rate, 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 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. Typically commodity markets depend on
politics that affect international trade, e.g. boycotts and embargoes, or
factors that influence natural capital, e.g. weather that affects food crops.
Meanwhile, stock markets are more influenced by trust in corporate
leaders, i.e. individual capital, by consumers, i.e. social capital or "brand
capital" (in some analyses), and internal organizational efficiency, i.e.
instructional capital and infrastructural capital. Some enterprises issue
instruments to specifically track one limited division or brand. "Financial
futures", "Short selling" and "financial options" 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[edit]

The relationship between financial capital, money, and all other styles of
capital, especially human capital or labor, is assumed in central bank
policy and regulations regarding instruments as above.

Such relationships and policies are characterized by a political economy -

feudalist, socialist, capitalist, green, anarchist or otherwise. In effect, the
means of money supply 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, 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.

Marxist perspectives[edit]
It is common in Marxist theory to refer to the role of "Finance Capital" as
the determining and ruling class interest in capitalist society, particularly
in the latter stages.[6][7]

Valuation[edit]
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",
"mark-to-market" and "mark-to-future"[8] conventions are three different
approaches to reconciling financial capital value units of account.

Economic role[edit]
Socialism, capitalism, feudalism, anarchism, other civic theories 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.