What Is Capital
Source: Tavaga

Capital is the money used by businesses to buy raw materials and resources they need to produce their goods or services. It is the wealth of the company. Capital can be self-generated, i.e., the owner brings in the initial capital to start the business, or it can be generated from outside sources. There are various ways of raising capital. Retained earnings also form a part of the money as it will be reinvested in the business for further growth.

Capital = Assets – Liabilities

Sources of capital

  1. Equity shares & preference shares- Capital can be raised by issuing shares. This implies giving ownership of the company as shareholders are the owners of the company. There are various terms and conditions linked to the issue of shares. For ex:- there can be convertible shares, redeemable & irredeemable shares, etc.
  2. Debt financing- it involves issuing bonds, taking loans from banks or NBFCs (non-banking financial institution), availing loans from big investors who are not registered with SEBI like borrowing money by issuing Hundies
  3. Specialty Capital- it includes capital that is generated through vendor financing, sweat equity, negative cash conversion cycles, etc. 

Capital is not necessarily money, but it is anything that helps in the production and business activities of the business. Capital goods are the ones that are durable and utilized for a more extended period of time. For4 ex:- For a street food vendor, his capital is a stall, fixed assets like stove or microwave, etc. 

The various types of capital are financial capital, social capital, natural capital, private capital, human capital.

How capital is used

In order to generate profits, businesses use capital to facilitate the continued production of goods and services. To add value, businesses use the capital for a variety of different projects. The two most typical categories for capital allocation are labor and building expansions. A corporation or individual who invests capital hopes to outperform the cost of the capital.