Capital Investment

Reviewed by Vishnu | Updated on Sep 28, 2020

Introduction

Capital investment is the amount invested in a company to enhance its business objectives. Also, the individual/entity can earn an income or recover the invested capital from earnings generated by the company over the years.

Understanding Capital Investment

Capital investment can be explained in two different ways:

  1. A capital investment can be made by the executives of the company in their business by purchasing long-term securities/assets of the company. In such cases, the capital can be physical assets which could improve the business performance by a significant margin.

  2. An individual or an entity can make a capital investment in a particular business in the form of a loan. The investor can also choose to earn an income in the form of repayments or profits from the invested business.

More About Capital Investments

Capital investment can come from various sources, such as financial institutions, angel investors, and venture capitalists, among others. Generally, startups and new companies are the ones who seek capital investments.

However, after having received investments, the invested amount must be utilised to develop and push the business ahead. In the same line, if a company announces to go public, the large amount of funds pooled in from the investors is also considered as a form of capital investment.

Capital investment has its own disadvantages. While capital investment is made to improve a company's cash flow in operations, it may sometimes be insufficient to cover the expected costs. In such cases, the company could be forced to borrow funds from an external financier to cover for the miscalculations.

The company expects capital investment to help build its future in the long-run. However, capital investment results in the earnings of stakeholders being subdued in the short-term. In the same line, stockholders also keep track of the company's debts which is why capital investments are not favourable to many stakeholders.

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