Capital

In finance, capital refers to money or assets that are deployed to generate returns or fund productive activity. It's the foundational resource of the economic system — without capital, there are no investments, no businesses, and no economic growth.

Types of Capital in Finance:

Financial Capital: Money or liquid assets available for investment. "Allocating capital" means deciding where to deploy money for the best returns. Warren Buffett is often described as the world's greatest "capital allocator."

Working Capital: A company's short-term operational capital: Current Assets − Current Liabilities. Positive working capital means a company can pay its near-term bills; negative working capital is a red flag.

Equity Capital: Money raised by selling ownership stakes (stock) in a company. Equity capital doesn't need to be repaid but dilutes existing shareholders.

Debt Capital: Money raised by borrowing (bonds, loans). Must be repaid with interest. Cheaper than equity in cost but carries financial risk.

Physical Capital: Tangible assets like equipment, factories, and machinery used in production.

Human Capital: The productive capacity of people — skills, knowledge, experience.

Capital in Investing:

• Capital gains: Profits from selling an investment above its purchase price
• Capital losses: Losses from selling below purchase price
• Capital preservation: Protecting the original investment from loss (conservative strategy)
• Capital appreciation: Growing the value of the investment over time
• Capital allocation: The process of deciding where to invest money for optimal returns

The Cost of Capital: Every company has a "cost of capital" — the minimum return it needs to earn on investments to satisfy both debt holders (interest) and equity holders (expected returns). Investments that earn above the cost of capital create value; below it destroys value.

WACC (Weighted Average Cost of Capital) blends the cost of debt and equity to give a company's overall hurdle rate.