Understanding Capital

Introduction:

This first lesson focuses on investment capital - what it is, where it comes from, and who uses it and for what purposes.

Investment capital is one of the basic building blocks of a modern economy. It is essential to economic growth and prosperity. In simple terms, it is money used to create wealth, either through investment in plant and new products (by companies) and in infrastructure (by governments) or through the purchase of stocks, bonds, or real estate by individual investors.

Investment capital will always flow to where the opportunities for wealth creation are most favourable. Since there are few restrictions on the movement of investment capital world-wide, investors can be extremely selective as to the countries or localities they target. The political environment, economic conditions, and government policies all have an impact on the flow of investment. The ability of a country or region to attract foreign as well as domestic investors is often seen as a measure of its economic vitality and stability. The Canadian securities industry seeks to ensure, through consultations with the federal and provincial governments, that the investment climate in Canada remains competitive with that of other countries.

Neither non-financial businesses nor governments are major suppliers of investment capital in Canada. The former usually retain earnings for internal use; the latter, although many have eliminated deficits, still have high levels of debt. That leaves individual Canadians and non-resident corporate and individual investors.

While individual Canadians have been and remain a significant source of investment capital, Canada relies to a considerable extent on foreign investment, a situation that brings costs as well as opportunities. With increasing globalization, Canadian companies need to acquire a global reach and that foreign investment or ownership is often necessary to achieve this. Recently, government policy has favoured a relaxation of controls on foreign ownership, but the debate is far from over.

The transfer of capital is facilitated by various kinds of financial instruments. These are discussed at length later in the text. For now, the main thing to remember is that there are two main types of financial instruments - debt and equity. Debt, such as government and corporate bonds, represents a promise to repay borrowed funds by a specified date. Equity, often called stock or shares, represents an ownership stake in a company.

There are actually many different types of securities to purchase:

* equities

* bonds

* mutual funds

* derivatives

* financially engineered hybrids

When purchasing any form of security (e.g., equities or bonds), investors base their decisions on certain broad investment objectives. For example, some