Study Words

What is “capital” and how can you use it?

Ever wonder why everyone keeps talking about "capital?" Well, we will explain that in today's article.

Capital – (noun) wealth that is in the form of money or other important assets, which is used as a sign of strength of an individual, organization, or nation. Often assumed to be available for any form of development and investment.

[\ˈka-pə-təl ]

This is part of an ongoing series explaining business English vocabulary, labeled “Study Words”. Previously we had talked about what an angel investor is. You can find more articles related to business and financial words in English by searching “study words” in the search box.

Capital is one of the key concepts used in business English. Capital has a wide range of usage, and even within business there are several different words that use “capital”.

You may ask yourself what the difference is between “money” and “capital”. While money can be used to buy things, capital is able to create more wealth through investment. So for instance, we can look at a car. You might buy a car through money – credit, debit, or maybe even cash. If you own a car, you will be able to drive to work, or deliver new goods and services, or move to other parts of your country where there might be a job. These are all longer term things that will help create more wealth for yourself in the future, unlike money that is just used to purchase and sell things.

Because the term “capital” is quite broad, we are first going to look at a couple different ways to use it:

Working capital – this term is used to describe the difference between what a company currently owns (or assets) versus what the company owes (or liabilities). This is often measured in the short term by what is called “liquidity” – the ability to sell or buy something without changing the price of something. It is often used to see how strong or unhealthy a particular company is doing.
Debt capital  this is capital that is raised by receiving a loan. Often times, it is a loan made to a company that can repay it in the future. Debt capital can be gained through private sources like family members and friends, or through larger organizations like financial institutions or government loan programs
Equity Capital – this type of capital doesn’t need to be repaid. This might include private investments by a company’s owners, or contributions through selling stocks
Trading Capital – we use “trading capital” to talk about the amount of money used to buy and sell different stocks used for investment, known as investment securities. It is used to talk about capital that is more speculative in nature.
Human Capital – this refers to the knowledge, habits, social and personal abilities, embodied by people to do jobs and create greater economic worth.
Capital gains – these are the profits that are received through the sale of things such as stocks, bonds, or real estate.

Alright guys. We did it. Lots of reading. Let’s keep going

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TL;DR = Too Long; Didn’t Read. Used as internet slang to talk about writing or posts that are too long. Hopefully this wasn’t too long for you.

So, how do we use all of these terms? Great question. Let’s look at a few real life usages. First, let’s look at a Bloomberg News article talking about one of Scandinavia’s biggest private equity fund EQT AB arguing against a recent tax policy implemented in Sweden

The Stockholm appeals court ruled last week that some of the profit-sharing from investments in private equity funds should be treated as salary rather than capital gains, backing the tax authority’s argument that partners were employees in consultancy firms, paid in carried interest. The decision, which directly affects about 85 employees in the industry, marked a victory for Sweden’s tax authority after it lost a similar case in the same court in December 2013.

As you can see, a court in Stockholm has decided that profit-sharing from investments in private equity funds should be seen as someone’s salary rather than capital gains, the profits that are received through the sale of things such as stocks, bonds, or real estate. This may be a victory for tax collectors in Sweden, but not necessarily for equity fund managers.

We can also see a great illustration of “working capital” in an article from India Today discussing a recent partnership between LendingKart Finance and BASIX Sub-K.

Under the partnership, collateral free short term working capital loan would be given to the micro-enterprises empowered by BASIX Sub-K.

Because we are dealing with “micro-enterprises” – extremely small companies (think maybe your Uncle or someone you know who is just starting their own small business selling things), there will be “collateral free short term working capital loans”. In essence, these are small amounts of capital that cost very little to buy (although they require “collateral” or property that a borrower gives to a lender to secure a loan) that are used to help start up their business. They will use this working capital to start up their business, and pay back the loan through selling their goods and services.

You might be wondering, though, “why would they use “working capital” and not “capital debt”? I mean, they are talking about loans. Isn’t that capital debt?” That’s a great question. The difference here is that the loan is here to measure the health of the company, and is not necessarily used to add greater value to an established company. In other words, this working capital loan is used to help start the business, not to add value to the business.

 

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