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CAPITAL INVESTMENTS

TAILORED SOLUTIONS TO MEET YOUR NEEDS

WHAT IS CAPITAL INVESTMENT (CI)?

Capital investment is the procurement of money by a company in order to further its business goals and objectives. The term can also refer to a company's acquisition of long-term assets such as real estate, manufacturing plants and machinery.

KEY TAKEAWAYS

  • A capital investment is defined as a sum of cash acquired by a company to pursue its objectives, such as continuing or growing operations.

  • It also can refer to a company's acquisition of permanent fixed assets such as property, plant and equipment (PP&E).

  • A capital investment can be made via several sources including using cash on hand, selling other assets, or raising capital through the issuance of debt or equity.

 

How an Investment Works

 

Capital investment is a broad term that can be defined in two distinct ways:

  1. An individual, a venture capital group or a financial institution may make a capital investment in a business. A sum of money is handed over as a loan, or in return for a promise of repayment or a share of the profits down the road. In this sense of the word, capital means cash.

  2. The executives of a company may make a capital investment in the business. They buy long-term assets that will help the company run more efficiently or grow faster. In this sense, capital means physical assets.

In either case, the money for capital investment must come from somewhere. A new company might seek capital investment from any number of sources, including venture capital firms, angel investors and traditional financial institutions. The company uses the capital to further develop and market its products. When a new company goes public, it is acquiring capital investment on a large scale from many investors.

An established company might make a capital investment using its own cash reserves, or seek a loan from a bank. If it is a public company, it might issue a bond in order to finance capital investment.

There is no minimum or maximum capital investment. It can range from less than $100,000 in seed financing for a start-up, to hundreds of millions of dollars for massive projects undertaken by companies in capital-intensive sectors such as mining, utilities and infrastructure.

IMPORTANT: Capital investment is meant to benefit a company in the long run, but it nonetheless can have short-term downsides.

Special Considerations

A decision by a business to make a capital investment is a long-term growth strategy. A company plans and implements capital investments in order to ensure future growth.

Capital investments generally are made to increase operational capacity, capture a larger share of the market, and generate more revenue. The company may make a capital investment in the form of an equity stake in another company's complementary operations for the same purposes.

TYPES OF INVESTMENTS

 

Fixed Interest Rate

The best known type of fixed interest investments are bonds, which are essentially when governments or companies borrow money from investors and pay them a rate of interest in return.

 

Bonds are also considered as a defensive investment, because they generally offer lower potential returns and lower levels of risk than shares or property.

They can also be sold relatively quickly, like cash, although it’s important to note that they are not without the risk of capital losses.

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Cash Equivalent

Cash equivalents are investments securities that are meant for short-term investing; they have high credit quality and are highly liquid.

Cash equivalents, also known as "cash and equivalents," are one of the three main asset classes in financial investing, along with stocks and bonds. These securities have a low-risk, low-return profile and include U.S. government Treasury bills, bank certificates of deposit, bankers' acceptances, corporate commercial paper, and other money market instruments.

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Cash Investment

A cash investment is a short-term obligation, usually fewer than 90 days, that provides a return in the form of interest payments.

 

Cash investments generally offer a low return compared to other investments. They may also have very low levels of risk, in addition to being insured by the Federal Deposit Insurance Corporation (FDIC).

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Growth Investment

Growth investing is an investment style and strategy that is focused on increasing an investor's capital.

 

Growth investors typically invest in growth stocks—that is, young or small companies whose earnings are expected to increase at an above-average rate compared to their industry sector or the overall market.

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Property Investment

An property investment is real estate property purchased with the intention of earning a return on the investment either through rental income, the future resale of the property, or both.

 

The property may be held by an individual investor, a group of investors, or a corporation.

The term property investment may also be used to describe other assets an investor purchases for the sake of future appreciation such as art, securities, land, or other collectibles.

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Investor Shares

Investor shares are mutual fund class of shares that are structured specifically for investment by individual (retail) investors, as opposed to institutional investors. Investor shares are most commonly offered in open-end mutual funds.

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