Capital, Capital Accumulation

November 23, 2010Capital Investmentby EconomyWatch

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Capital is wealth that may be in the form of money or property (including real estate, stocks and bonds) owned by an entity (a person or business). In the world of investing, the term capital can be used for assets that are invested in order to gain from a rise in their value. Capital accumulation is the growth in the total value of the capital.

Capital: Related Terms

Here are some terms associated with the concept of capital:

  • Capital Asset: Any asset used for wealth creation.
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  • Capital Gains: The profits made on selling an asset.
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  • Capital Market: This is the marketplace for securities, such as shares and bonds, where businesses try to raise long term funds.
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  • Financial Instruments: Contracts of various combinations of capital assets, serving as a store of value, unit of account, medium of exchange or standard of deferred payment.
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    • Capital Budgeting: Also known as investment appraisal, it is the planning process that determines the profitability of long term investments.
    • Cost of Capital: The cost to a borrower when they are loaned money, or the interest rate on a principal amount that has been loaned.
    • Capital Appreciation: The rise in the market value of an asset above the original investment in it.
    • Capital Risk: The risk of losing the whole or part of the principal amount spent on an investment.

    Connotations of Capital Accumulation

    The term capital accumulation can have various connotations in different contexts:

    • spending less than what one earns (accumulation in the form of savings).
    • making investments in physical assets such as plants, equipment, machinery and raw materials.
    • investing in contracts of assets on paper.
    • training human capital and increasing its skill base.

    There is always a possibility that the return on an investment will differ from expectations. The amount of risk that investors are willing to take is directly proportional to the potential returns on their investments. This is because investors have to be rewarded for taking additional risk. For example, US Treasury bonds are one of the safest and lowest yielding investments. The capital appreciation on stocks is much higher, since they are much more risky (a corporation is more likely to declare bankruptcy than the US government).

     

     

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