Own and borrowed capital[edit]

Capital contributed by the owner or entrepreneur of a business, and obtained, for example, by
means of savings or inheritance, is known as own capital or equity, whereas that which is granted by
another person or institution is called borrowed capital, and this must usually be paid back with
interest. The ratio between debt and equity is named leverage. It has to be optimized as a high
leverage can bring a higher profit but create solvency risk.

Borrowed capital[edit]
This is capital which the business borrows from institutions or people, and includes debentures:

Redeemable debentures

Irredeemable debentures

Debentures to bearer

Ordinary debentures

bonds

deposits

loans

Own capital[edit]
This is capital that owners of a business (shareholders and partners, for example) provide:

Preference shares/hybrid source of finance

Ordinary preference shares

Cumulative preference shares

Participating preference shares

Ordinary shares

Bonus shares

Founders' shares

These have preference over the equity shares. This means the payments made to the shareholders
are first paid to the preference shareholder(s) and then to the equity shareholders.

Issuing and trading[edit]

Like money, financial instruments may be "backed" by state military fiat, credit (i.e. social capital held
by banks and their depositors), or commodity resources. Governments generally closely control the
supply of it and usually require some "reserve" be held by institutions granting credit. Trading
between various national currency instruments is conducted on a money market. Such trading
reveals differences in probability of debt collection or store of value function of that currency, as
assigned by traders.
When in forms other than money, financial capital may be traded on bond markets or reinsurance
markets with varying degrees of trust in the social capital (not just credits) of bond-issuers, insurers,
and others who issue and trade in financial instruments. When payment is deferred on any such
instrument, typically an interest rate is higher than the standard interest rates paid by banks, or
charged by the central bank on its money. Often such instruments are called fixed-income
instruments if they have reliable payment schedules associated with the uniform rate of interest. A
variable-rate instrument, such as many consumer mortgages, will reflect the standard rate for
deferred payment set by thecentral bank prime rate, increasing it by some fixed percentage. Other
instruments, such as citizen entitlements, e.g. "U.S. Social Security", or other pensions, may be
indexed to the rate of inflation, to provide a reliable value stream.
Trading in stock markets or commodity markets is actually trade in underlying assets which are not
wholly financial in themselves, although they often move up and down in value in direct response to
the trading in more purely financial derivatives. Typically commodity markets depend on politics that
affect international trade, e.g. boycotts and embargoes, or factors that influence natural capital, e.g.
weather that affects food crops. Meanwhile, stock markets are more influenced by trust in corporate
leaders, i.e. individual capital, by consumers, i.e. social capital or "brand capital" (in some analyses),
and internal organizational efficiency, i.e. instructional capital and infrastructural capital. Some
enterprises issue instruments to specifically track one limited division or brand. "Financial futures",
"Short selling" and "financial options" apply to these markets, and are typically pure financial bets on
outcomes, rather than being a direct representation of any underlying asset.

Broadening the notion[edit]

The relationship between financial capital, money, and all other styles of capital, especially human
capital or labor, is assumed in central bank policy and regulations regarding instruments as above.
Such relationships and policies are characterized by a political
economy - feudalist, socialist, capitalist, green, anarchist or otherwise. In effect, the means of money

supply and other regulations on financial capital represent the economic sense of the value system
of the society itself, as they determine the allocation of labor in that society.
So, for instance, rules for increasing or reducing the money supply based on perceived inflation, or
on measuring well-being, reflect some such values, reflect the importance of using (all forms of)
financial capital as a stable store of value. If this is very important, inflation control is key - any
amount of money inflation reduces the value of financial capital with respect to all other types.
If, however, the medium of exchange function is more critical, new money may be more freely issued
regardless of impact on either inflation or well-being.

Marxian perspectives[edit]
It is common in Marxian theory to refer to the role of "Finance Capital" as the determining and ruling
class interest in capitalist society, particularly in the latter stages.[6][7]

Valuation[edit]
Normally, a financial instrument is priced accordingly to the perception by capital market players of
its expected return and risk.
Unit of account functions may come into question if valuations of complex financial instruments vary
drastically based on timing. The "book value", "mark-to-market" and "mark-to-future"[8] conventions
are three different approaches to reconciling financial capital value units of account.

Economic role[edit]
Socialism, capitalism, feudalism, anarchism, other civic theories take markedly different views of the
role of financial capital in social life, and propose various political restrictions to deal with that.
Finance capitalism is the production of profit from the manipulation of financial capital. It is held in
contrast to industrial capitalism, where profit is made from the manufacture of goods.

See also[edit]

Book: Finance
Wikimedia Commons has
media related to Wealth.

Banking

Capital market

Constant item purchasing power accounting

Financialization

Funding

International Financial Reporting Standards

Money supply

List of finance topics

List of accounting topics

Notes[edit]
1.

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