Information on capital

This information on capital hub contains a list of the most common business and finance terms which have the word ‘capital’ in them. Each term has a brief explanation, plus a link to an article that explains its meaning in more detail.

The English word ‘Capital’ originates from ‘Capitale’, which itself came from the Latin word ‘Caput’, meanings ‘head’. In Spanish, Portuguese, and French the word is also ‘capital’, in Italian – capitale, German – Kapital, Russian – капитал, Japanese – 資本, and Chinese – 资本.

Anglo-Saxon Capitalism – a type of free-market economic system prevalent in the English speaking countries, i.e. the UK, US, Canada, Australia, Ireland and New Zealand. There are fewer regulations, and taxes are lower than in the European economic models.

Bank Capital – a cushion of safe assets and cash that banks hold to protect their creditors in case of financial crises. The more capital a financial institution has, the better it can absorb financial shocks.

Big Society Capital – a entity the UK Government set up in 2012. It is a (independent) financial institution aimed at helping expand the social investment market.

Capital – one of the assets, along with land and labor, required for production. Examples include equipment, machinery, computers, vehicles, etc. The term also refers to funds used to set up a business or expand one, as well as money used for investments.

Capital Adequacy Ratio (CAR) How CAR is calculated – shows how good a financial institution is at absorbing losses and financial shocks. CAR is determined by calculating the ratio of capital to risk.

Capital Assets – things that companies require to produce goods or deliver services. Examples include computer equipment, vehicles and machinery. If a capital asset is sold, the seller is liable to capital gains tax.

Capital Controls – measures taken by a countries’ authorities to limit how much money flows in or out (usually ‘out’). The limits are imposed by either the government or the central bank. Measures can include volume restrictions, legislation, minimum-stay requirements, and tariffs.

Capital Flight – when money flows out of a country in large amounts because people have lost confidence in the economy and/or government. Reasons may include a sharp rise in taxes, political instability, a natural disaster, or a default.

Capital Formation – the growth of capital goods, which comes from savings that are channeled by institutions into investments. Capital goods are things and products used to produce goods and services. Also known as capital accumulation.

Capital Gain – when a capital asset is sold for more than was paid for it. The opposite of a capital loss. In most nations, if you make a capital gain you are liable for capital gains tax.

Capital Goods – things that are utilized to produce goods and provide services. Examples include machinery, computers, equipment, buildings, vehicles, etc.

Capital Growth – the rise in value of an asset/investment over time. Its original value is compared to what it is now worth. Also called capital appreciation.

Capitalism – an economic model where production, industry and trade are mainly in private hands, and operate to generate profit. All the world’s advanced economies claim to follow capitalist systems.

Capital Markets – markets where equity-backed securities and long-term debt are bought and sold. Savers’ funds are directed to organizations, governments and companies that need medium-term and long-term finance.

Economic Capital – the amount of risk capital a bank should have so that it can absorb the shocks thrown at it during financial crises. How much is determined either by shareholders or the company itself.

Human Capital – investments made in order to make human beings more productive. Human capital includes our talent, skills, judgment, experience, education, training, etc.

Loan Capital – the money businesses borrow from banks, people and other organizations for a pre-agreed period, on which they pay interest. Companies most commonly raise loan capital with a bank loan, debentures, or a bank overdraft.

Market Capitalization – the net value of stocks (shares) a public company has issued. Market capitalization is calculated by multiplying the share price by the number of shares outstanding. Also known as market cap.

Return on Capital – refers to how much you get back from an investment in relation to the total you invested over a specified period (usually one year).

Seed Capital – a type of venture capital invested in a project or business during its very early stage, i.e. its conceptual or idea stage. In most cases, the capital is provided by a close friend or family member. Also known as seed money or seed funding.

Share Capital – the capital of a company that came from the sale of shares. The nominal share price is used in the calculation. Share capital also refers to a business’ share structure.

Social Capital – a value put on human networks. The term refers to the collective value of all networks people have, and the tendency for us to trust members of our networks more than outsiders, and do more things together.

Tier 1 Capital – a financial institution’s (bank’s) core capital. Considered a more reliable measure than Tier 2.

Tier 2 Capital – an element used to measure a financial institution’s (bank’s) total capital base. A less reliable measure compared to Tier 1.

Venture Capital (VC) – funding provided to entrepreneurs and start-ups that are believed to have promising futures. VC is a type of private equity. Venture capitalists usually back just a few proposals after seeing literally hundreds and perhaps thousands of them.

Working Capital – a measurement of how much operating liquidity a business has. It is a measure of a company’s liquidity, overall health and efficiency.