Trading capital

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Trading capital
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Trading capital is the amount of money dedicated to buying and selling securities as part of the strategy. Usually trading capital is separate from investment capital due to its more risky, speculative nature. Other name for trading capital is bankroll. Employing different trading optimization methods by the traders gives them a chance to add to their trading capital. The key aspect of those methods is that they attempt to make the best use of the resources by allocating an ideal percentage of funds every time. Trading capital is different from investment capital[1]

How to understand capital

To be considered a capital, goods must provide constant business service to create wealth. Capital must be linked to labour, work units that exchange their time and skills and competences for money to create value. Investing in capital and current consumption can bring future prosperity for a company. In accounting, capital refers to money invested in a business with the future intention of generating income for the enterprise. In economics, capital describes factors of production that are being used to create value in the form of goods or services, but they are not involved in the production process themselves, e. g. land.

Tangible assets that act as capital within an enterprise are depreciated, which occurs over time as a normal consumption of an item, reducing its overall value. Depreciation is often noted in the company's financial statements and may qualify for a tax deduction. Another term for depreciation is amortization.

Difference between money and capital

People tend to exchange the words capital and money thinking they mean similar things. In reality, there is a fundamental difference between them. Capital takes into account parts of the company that help form the development of the company. Money, in comparison to capital, is rather an instrument that is used for purchasing goods or services and for more direct and clearly defined, short term purposes. Capital, on the other hand, includes any asset of the company that may benefit company is some way in long term.

The capital is usually more durable than money, that is used for buying goods mainly for consumption. Moreover, capital generates wealth for the enterprise through investment. Examples of capital include cars, land, brand names, software, patents, licences. All these tangible or intangible assets, besides being used in business activities such as production can be sold (when not needed) or rented out for external clients for periodical fee.

Different types of capital

There are different types of capital such as:

  • Debt capital
  • Working capital
  • Equity capital

Debt capital refers to taking over debt by the company. Debt can be obtained from several sources: private (e.g. friends and family), financial institutions such as banks or public sources.

Working capital measures company's short term liquidity (ability to cover all liabilities due within a year). It shows the financial health of the enterprise [2]

Equity capital is based around investment that does not need to be repaid. It usually refers to private investments or money collected from stock sales [3]

Footnotes

  1. Barbosa R. P., Belo O., 2010, p. 91-118
  2. Gill A., Biger N., Mathur N., 2010
  3. Paige L., Fieldsa D., Frasera R., Subrahmanyam A., 2012, p. 1536-1547

References

Author: Jan Kaptur