Capital
Financial capital refers to the monetary resources or assets that individuals, businesses, or governments use to facilitate economic activities, invest in various ventures, and meet financial obligations. It is a fundamental component of the broader concept of capital and plays a crucial role in the functioning of economies. Financial capital comes in various forms and serves diverse purposes:
- Cash and Equivalents: Liquid assets like cash, bank deposits, and short-term investments for day-to-day transactions.
- Securities: Securities are financial instruments representing ownership or a creditor relationship with a company or government—investments in stocks, bonds, and financial instruments for capital appreciation and income. Equity, Bonds, and Derivatives are three main types of securities.
- Equity: Equity refers to ownership in a company and represents a claim on the company’s assets and earnings. It is often in the form of stocks or shares. Equity holders have voting rights and may receive dividends based on the company’s profitability. The value of equity can fluctuate based on the performance and perception of the company.
- Bonds: Bonds are financial instruments that signify a loan from an investor to a borrower, often a corporation or government. When investors buy a bond, they essentially lend money to the issuer in exchange for periodic interest payments and the return of the principal amount at the bond’s maturity. Bonds are considered lower risk than stocks but generally offer lower potential returns.
- Derivatives: Derivatives are financial instruments whose worth is based on an underlying asset, index, or rate. They are contracts between two parties, where the value is based on changes in the underlying asset’s price. Options and futures contracts are examples of common derivatives. Derivatives can be used to hedge against risks, speculation, or gain leverage, but they also carry a higher level of risk and complexity than traditional securities.
- Bank Loans and Credit: Businesses and individuals can access financial capital through loans and credit provided by financial institutions. This capital allows them to make significant investments, expand operations, or manage cash flow effectively.
- Retained Earnings: Profits reinvested in businesses for growth, research and development, and strategic initiatives instead of distributed as dividends.
- Venture Capital and Private Equity: Startups and growing businesses often raise financial capital from venture capitalists or private equity firms. These investors provide funding in exchange for equity ownership, facilitating business expansion and development.
Asset
- Convertibility:
- Current Assets: Assets that are expected to be converted into cash or used up within a short period, typically within a year. Cash, accounts receivable, and inventory are some examples of current assets.
- Liquid assets—Liquid assets are a type of current asset that can be easily converted into cash without losing much value. Examples include physical currency and coins, bank deposits, short-term debt securities like Treasury bills, certain stocks like Blue-chip stocks, and marketable securities with a maturity of less than one year.
- Fixed Assets: These are long-term assets that are not easily converted into cash and are expected to provide value over an extended period. This category includes property, plant, equipment, and intangible assets.
- Physical Existence:
- Tangible Assets: These are physical assets with a definite and discernible presence. Examples encompass machinery, buildings, and land.
- Intangible Assets: Assets lacking physical form but hold intrinsic value, such as patents, trademarks, and goodwill.
- Usage:
- Operating Assets: Assets actively employed in the day-to-day operations of a business to generate revenue. This category includes inventory, equipment, and accounts receivable.
- Non-operating Assets: Assets held for purposes other than core business operations, such as investments, strategic holdings, or assets awaiting for sale.
Liability
Liability refers to an obligation a person or a company owes to another party. It’s a debt or obligation that needs to be settled in the future. Managing liabilities is important for assessing a company’s ability to meet its financial commitments and evaluating overall risk.
There are two main types of Liability:
- Current Liabilities: Short-term debts or obligations expected to be settled within a year, like money owed to suppliers or short-term loans.
- Non-current Liabilities: Long-term debts or obligations, such as long-term loans or bonds, are expected to be settled after a year.
- The l
Liability equation is:
Assets=Liabilities+Equity
Liquidity
Liquidity is how easily an asset can be bought or sold without causing a big change in its price. High liquidity means it’s easy to trade, while low liquidity can lead to bigger price swings. Liquidity is important for smooth market functioning, as liquid assets can be quickly converted to cash. Liquidity depends on factors like trading volume, market participants, and bid-ask spreads. Central banks and institutions monitor liquidity to maintain financial stability.
Stocks
Stocks represent ownership in a company and are a form of financial instrument traded on stock exchanges. When individuals purchase stocks, they become shareholders in the company, giving them certain rights, such as voting on corporate decisions and receiving a portion of the company’s profits in the form of dividends.
Dividend
Dividends are a form of profit distribution made by a corporation to its shareholders. These payments are typically made in cash, although they can also be issued in the form of additional shares of stock. Companies distribute dividends to share their financial success with shareholders, offering them a return on their investment.
Stock Broker
A stock broker is a person or firm that facilitates the buying and selling financial securities, such as stocks and bonds, on behalf of investors.
Market Capitalization
Market capitalization, also known as market cap, measures a company’s overall worth in the stock market.
There are generally three categories based on market cap:
- Large Cap: The company’s valuation is over $10 billion.
- Mid Cap: Companies valued between $2 billion and $10 billion.
- Small Cap: Companies valued below $2 billion.
The formula for calculating market capitalization is:
Market Capitalization = Current Market Price per Share×Total Outstanding Shares
