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{{Short description|Economic resources used to buy what is needed to make products or provide services}}
{{About||a city with an important role in the world economy|Financial centre|and|Global city|the book|Rudolf Hilferding#Finance Capital}}
{{Distinguish|Capital (economics)|Economic capital}}
{{More citations needed|date=June 2022}}
'''Financial capital''' (also simply known as '''capital''' or '''equity''' in [[finance]], [[accounting]] and [[economics]]) is any [[Economic resources|economic resource]] measured in terms of [[money]] used by [[entrepreneur]]s and [[business]]es 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 (e.g. retail, corporate, [[investment banking]]). In other words, financial capital is internal [[retained earnings]] generated by the entity or funds provided by [[lenders]] (and [[Investor|investors]]) to businesses in order to purchase [[real capital]] equipment or services for producing new [[Goods and services|goods or services]].

In contrast, [[real 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).

== IFRS concepts of capital maintenance ==
''Financial capital'' generally refers to saved-up financial [[Wealth (economics)|wealth]], especially that used in order 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 [[Net equity|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.<ref name="Constantitem">[[Constant item purchasing power accounting#CIPPA as per the IASB's Framework.5B14.5D .5B15.5D]] Constant item purchasing power accounting</ref> Accordingly, there are three concepts of capital maintenance in terms of [[International Financial Reporting Standards]] (IFRS):<ref name="Constantitem" />

# Physical capital maintenance;
# Financial capital maintenance in nominal monetary units; and
# Financial capital maintenance in units of constant purchasing power.

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 (economics)|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.<ref>Spillane, James P., Tim Hallett, and John B. Diamond. 2003. "[https://web.archive.org/web/20120915110800/http://www.distributedleadership.org/DLS/Publications_files/Spillane,%20Hallett,%20Diamond.%20Forms%20of%20capital%20and%20the%20construction%20of%20leadership-%20Instructional%20leadership%20in%20urban%20elementary%20schools.pdf Forms of Capital and the Construction of Leadership: Instructional Leadership in Urban Elementary Schools]." ''[[Sociology of Education (journal)|Sociology of Education]]'' 76(1):1–17. {{JSTOR|3090258}}.</ref><ref>Spillane, James P., Tim Hallett, and John B. Diamond. 2003. "Forms of Capital and the Construction of Leadership: Instructional Leadership in Urban Elementary Schools." Sociology of Education 76 (January): 1-17 {{verify source |date=November 2020 |reason=This ref was deleted Special:Diff/965734946 by a bug in VisualEditor and later restored by a bot from the original cite located at Special:Permalink/964348380 cite #3 - verify the cite is accurate and delete this template. [[User:GreenC_bot/Job_18]]}}</ref><ref>The Risk Report, April 2009. Volume XXXI No. 8. [http://www.irmi.com/ IRMI] {{webarchive|url=https://web.archive.org/web/20090410004043/http://www.irmi.com/ |date=2009-04-10 }}. {{verify source |date=September 2019 |reason=This ref was deleted Special:Diff/903130420 by a bug in VisualEditor and later restored by a bot from the original cite located at Special:Permalink/890802002 cite #4 - verify the cite is accurate and delete this template. [[User:GreenC_bot/Job_18]]}}</ref> Financial capital has been subcategorized by some academics as [[real capital|economic]] or "[[productive capital]]" necessary for operations, [[Signalling (economics)|signaling]] capital which signals a company's financial strength to shareholders, and regulatory capital which fulfills [[capital requirement]]s.<ref>The Risk Report, April 2009. Volume XXXI No. 8. [http://www.irmi.com/ IRMI] {{webarchive|url=https://web.archive.org/web/20090410004043/http://www.irmi.com/ |date=2009-04-10 }}.</ref>

==Sources of capital==
* Long term – usually above 7 years
** [[Share capital|Share Capital]]
** [[Mortgage loan]]
** [[Retained Profit]]
** [[Venture capital]]
** [[Debenture]]
** [[Project finance]]
* Medium term – usually between 2 and 7 years
** [[Term loan|Term Loans]]
** [[Revenue-based financing]]
** [[Leasing]]
** [[Hire Purchase]]
* Short term – usually under 2 years
** [[Overdraft|Bank Overdraft]]
** [[Trade credit]]
** [[Deferral|Deferred Expenses]]
** [[Factoring (finance)|Factoring]]

===Capital market===
* Long-term funds are bought and sold:
** Shares
** [[Debenture]]
** Long-term loans, often with a [[mortgage bond]] as security
** Reserve funds
** [[Eurobond (eurozone)|Euro Bonds]]

===Money market===
* 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
** [[Negotiable instrument|Bills of exchange]]
** Factoring of debtors

==Differences between shares and debentures==
* [[Shareholder|Shareholders]] are effectively owners; debenture-holders are creditors.
* Shareholders may vote at AGMs ([[Annual general meeting|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 (law)|dissolution]] the firm's debenture holders are paid first, before shareholders.

==Types of capital==
===Fixed capital===
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:
* Nature of business
* Size of business
* [[Organizational life cycle|Stage of development]]
* Capital invested by the owners
* location of that area

===Working capital===
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:
* 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

===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 (finance)|equity]], whereas that which is granted by another person or institution via debt instruments is called borrowed capital, and this must usually be paid back with interest. The ratio between debt and equity is named [[Leverage (finance)|leverage]]. It has to be optimized as a high leverage can bring a higher profit but create [[solvency]] risk.

'''Borrowed capital''' is capital that the business borrows from institutions or people, and includes debentures:
*[[Callable bond|Redeemable debenture]]s
*[[Irredeemable debentures]]<!-- WAIT--WAIT! Before you remove the brackets, consider writing a new article! -- Paine -->
* Debentures to bearer
* Ordinary [[debenture]]s
* bonds
* deposits
*loans

'''Own capital''' is private capital that owners of a business (shareholders and partners, for example) provide, sometimes called owners equity. The ownership interest is typically represented in [[Preferred stock|preferred]] [[Share (finance)|shares]], and may be of various types, for example:
* Preference shares/hybrid source of finance
** Ordinary preference shares
** Cumulative preference shares
** Participating preference shares
* Ordinary shares
* Bonus shares
* Founders' shares

These typically have preference over the [[Common stock|common share]]s. This means the payments made to the shareholders are first paid to the preference shareholder(s) and then to the equity shareholders.

== Instruments ==
A [[contract]] regarding any combination of [[capital asset]]s 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.

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

==Issuing and trading==

Like money, financial instruments may be "backed" by state [[military fiat]], [[credit (finance)|credit]] (i.e. [[social capital]] held by banks and their depositors), or precious metals 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 market]]s or [[Reinsurance|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|fixed-income instrument]]s if they have reliable payment schedules associated with the uniform rate of interest.  A variable-rate instrument, such as many [[Mortgage loan|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 entitlement]]s, e.g. "[[U.S. Social Security]]", or other pensions, may be indexed to the rate of inflation, to provide a reliable value stream.

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 future]]s", "[[Short selling]]" and "[[option (finance)|financial option]]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]], and all other styles of [[capital (economics)|capital]], especially [[human capital]] or [[labour (economics)|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]], [[capitalism|capitalist]], [[Green politics|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 (economics)|inflation]], or on [[measuring well-being]], reflect some such [[theory of value (economics)|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.

==Economic role==
[[Socialism]], [[capitalism]], [[feudalism]], [[anarchism]], and other [[civics|civic theories]] take markedly different views of the role of financial capital in social life, and propose various political restrictions to deal with that.

Financial 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.

===Marxist perspectives===
{{main|Finance capitalism}}
It is common in [[Marxism|Marxist]] theory to refer to the role of finance capital as the determining and ruling class interest in capitalist society, particularly in the [[Late-stage capitalism|latter stages]].<ref>[[Imperialism, the Highest Stage of Capitalism]] [http://www.marxists.org/archive/lenin/works/1916/imp-hsc/ch03.htm ibid. Finance Capital and the Finance Oligarchy] {{webarchive|url=https://web.archive.org/web/20150402214909/https://www.marxists.org/archive/lenin/works/1916/imp-hsc/ch03.htm|date=2015-04-02}}</ref><ref>{{cite web|date=1 October 2009|title=Monopoly-Finance Capital and the Paradox of Accumulation - John Bellamy Foster - Monthly Review|url=http://www.monthlyreview.org/091001foster-mcchesney.php|url-status=live|archive-url=https://web.archive.org/web/20110317032958/http://www.monthlyreview.org/091001foster-mcchesney.php|archive-date=17 March 2011|access-date=3 May 2018|website=monthlyreview.org}}</ref>

==See also==
*[[Capital market]]
*[[Constant item purchasing power accounting]]
*[[Financial risk management]]
*[[Financialization]]
*[[Funding]]
*[[Money supply]]
*[[List of finance topics]]

==References==
{{Reflist|30em}}

== Sources ==
*[http://bankofinfo.com/difference-between-shares-and-debentures/ Difference between Shares and Debentures]

==Further reading==
*F. Boldizzoni, ''Means and Ends: The Idea of Capital in the West, 1500-1970'', New York: Palgrave Macmillan, 2008, chapters 7-8

{{Types of capital}}

{{Authority control}}

[[Category:Financial capital| ]]
[[Category:Asset management]]
[[Category:Business terms]]