No matter how many types of capital, there is a function for any of these types: moving any business and pushing it forward by providing all the necessary needs.
Knowing all the possible information about capital is important for many people, including:
– Entrepreneurs and startups.
– Beginners who want to start their own business.
– Novice investors who want to take advantage of their funds and assets.
– University students in the field of economics and accounting.
– Anyone interested in the economy and its types.
If you are one of these, you will find in this article the types of capital that you should know, as well as some of the concepts you need to know.
In this article you will learn about:
+ Definition of capital and its importance.
+ Forms of capital in the modern economy.
+ Types of capital in terms of dealing in the market.
+ Types of capital in terms of sources obtained.
And that’s not all. There are also some questions that you might think of when looking at different types of capital and deepen their knowledge, such as:
Is there a difference between money and capital?
Is the value of capital fixed or variable?
Does the company have programs and equipment included in the capital assessment?
All these questions and more will be answered between the lines of this article, and you will find these answers presented in a simple way understood by anyone with practical examples, this is our habit of winners.
What is capital?
Capital is an economic term that refers to all financial resources, manufactured resources, and assets necessary to start any economic activity such as the sale of products or the provision of services, whether for profit, promotion or service work.
According to this definition there are many people or institutions that need capital such as:
– Owners of projects (shops – companies – institutions).
– Charitable and service institutions.
– Governmental institutions.
– Politicians and electoral candidates.
All these and others need capital, whether to start their own businesses for profit, to provide a public service (such as government and charitable institutions), or to promote (such as politicians).
That’s why CFI, one of the world’s most famous investment and capital companies, says capital is “anything that enables any individual or organization to generate anything of value”.
This puts us in front of a comprehensive concept of the word capital. Capital is not just about the amount of money you need to start a project, it is all the equipment, capabilities and even people you need to achieve a particular goal.
I think that the traditional concept of capital has changed, and you have started to explore for yourself some forms of capital, and before we go deeper there are two important things you need to teach them first.
The importance of capital
In order to know the different types of capital, we must first know what capital is used, its role and its economic and social importance.
Uses of capital
Capital is used in the conduct of many tasks in any project, the most important of these uses:
– Provide some fixed assets that are not available (new lands – licenses and permits – equipment).
– Provide qualified human resources to implement the project or idea.
– Provide the necessary financial liquidity for the operation (salaries – raw materials – auxiliary tools).
– Look carefully at these uses, and remember because we will return to them later, because they are a key factor in determining the types of capital in the modern economy.
Capital is very important in our time, and this importance comes not only from the person who wants to start a business and profit from it, there are several things to keep in mind.
Capital is very important for several reasons including:
– Capital is the main engine of ideas and projects, without it there will be nothing, ideas will remain just ideas.
– Capital is what drives investment to exploit available resources, both natural and human.
– Capital drives the economy and creates the jobs needed by any society to move forward.
– Capital is a must to invest in human beings and develop their skills.
– Capital When invested properly will create many assets and resources, which in turn are used to increase the capital itself, thus creating more projects and opportunities.
So this capital is not just a number in a bank account, not just a piece of land you own and will carry out a project, it is much deeper, and this will become clear to you when we begin to show its different types and images.
Types of capital (general classification)
Capital has more than one rating, and each rating includes certain types of capital, which fit the purpose of the rating itself or the nature of the market.
But there is a general and comprehensive classification of capital, this classification, although simple, but it will make the image of capital in your mind as clear as the sun, and this is what we will show at this point.
Capital in its modern concept as I pointed out more than once is not just mere securities or shares in the stock exchange or piece of land or a set of equipment.
Therefore, types of capital take all possible forms that affect the production process, or the implementation of ideas on the ground, so there are three main types of capital.
1- Economic Captial
This is the first type of capital that everyone knows, it is the common image that appears in the mind of anyone talking about capital.
Economic capital focuses on the financial resources necessary for any project, and because these resources have more than one source, and since this is the common type of capital, we will talk about in detail later.
2. Natural Capital
This type is for all natural resources that any business or business may depend on, making it of great importance in large, high-return projects.
The most famous pictures of this type are:
– Land areas.
– Metals and raw materials, especially if rare.
– Animal resources, especially if they are scarce.
– Different environmental substances (some complex compounds and raw materials – bacteria and natural antibiotics).
This type of capital is of great importance not only to companies, but to entire countries. These resources have great value and constitute a large part of the total capital to start these types of projects.
For example, rare metals and land bounties that some countries excel attract a lot of projects, and if there are no financial resources to start these projects locally, governments can cooperate with private companies or foreign investors in the implementation of these projects.
Natural capital is a practical example of what I said at the beginning. Capital is not just the available liquidity.
3. Human Capital
Suppose, for example, that there are two factories, one with trained and experienced labor, and the other with regular labor, both of which contain the same number of machines, raw materials and land area.
Which manufacturers would cost more in the market if anyone wanted to buy one?
This is human capital that may make companies tune up to heaven because of their potential and capabilities that help to manufacture products and deliver services efficiently.
Of course, companies do not have human beings in the literal sense, but workers in any company or project under the contracts are part of that company or entity, unlike the social value of the company itself in the market.
A good example of this is Instagram, when Facebook acquired Instagram in 2012 for $ 1 billion and the company had only 13 employees.
These 13 people with their skills were one of the strongest reasons behind this high value, unlike the new market that Instagram has opened.
Now that we have learned about general types of capital, which include most forms of capital, let’s move on to the types of economic capital that everyone is interested in.
Types of Economic Capital
As I pointed out, there are more than one way we can identify the types of economic capital, but there are two classifications that we will address, and I think that will be enough until the picture becomes clear to you.
First: in terms of dealing in the market
This classification depends solely on the mobility of capital in the market, transactions and agreements, and there are only two types in this classification.
1- Fixed Capital
Fixed capital is everything that is not consumed in any trade or within a single production cycle, and there are many examples:
– Fixed machinery and equipment
– Fixed programs, systems and equipment
Fixed capital is often a good source of increasing corporate profits over time, so large companies are investing in the purchase of modern land and equipment.
This investment increases the company’s market value and also increases future profits.
2- Working Capital
Working capital is anything that is consumed once in the production cycle, such as goods and materials that turn into a final product being sold.
Working capital represents the money you need to conduct your work periodically in order to purchase the supplies used continuously in the production process of tools, as well as the necessary facilities such as salaries, transportation expenses and others.
And don’t forget that you often need this type of capital just for several productive cycles at the beginning of your project, and then you rely on sales to meet these obligations.
So when you consider starting a business, you need to consider these two types of capital, so you can evaluate everything accurately.
Second: In terms of financial value
This classification speaks of capital in terms of source. There are several ways in which capital can be obtained to initiate or develop projects.
It is capital that depends on borrowing. New entrepreneurs, or those who want to develop their existing projects, often rely on this type to achieve their goals.
Debt capital may be in the form of loans from banking institutions, from owners of capital, or even from relatives and acquaintances.
This type of capital is good in that the owner of the project is the owner of his project, but he must repay the loan on time with interest, especially if he relied on banking institutions.
2. Capital based on shareholding (Equity Capital)
This type of capital also depends on external sources, but in this case the other party obtains a share of the company or institution in exchange for a certain amount of money or contribution to a particular supplier.
Equity capital has become common in recent periods, because the employer avoids loans and interest, and in the case of loss will not bear the burden alone.
It waives part of its company or project in return for the development of this project and increase its income, and the other party or investor will benefit and high return if the project succeeds.
3- Trading Capital
Commercial capital is the amount of money that a company or person allocates in the purchase of assets, and is used to buy and exchange securities.
Many companies and individuals rely on buying bonds to invest and make profits, and commercial capital is the money allocated to it.
In this classification of capital types we can also list the working capital referred to earlier.
Knowing the types of capital is not only useful for anyone who wants to start a new venture, it is also useful for anyone who wants to learn to invest by contributing to companies, startups or economic partnership.
Knowing this information will help you assess the size of different companies and projects, and know their true value in the market.
Finally, I wish you success in your next economic adventure.