Investment capital definition – What is it? – Explanation
Investment capital definition and explanation
The term investment capital includes a variety of different meanings. The term is used by private investors as well as by companies. It describes the amount of money that can be used to invest.
While the meaning of investment capital is the same for companies and private investors, there are significant differences in how they can use investment capital. The following section will now explain the ways in which both private investors and companies can invest capital.
Investment capital is the capital that you are willing to invest.
Investment capital for companies
There are many ways for a company to invest capital.
For example, with some investments a company pursues the goal of increasing its influence and creating a competitive advantage. For this purpose, it can acquire patents and licenses, for example. Similarly, spatial expansion is sometimes responsible for a company to grow and gain importance. For this purpose, investments in new land or leases are then acquired, for example. Another way to expand in certain respects is to invest in research and development, so that new technologies can be used faster and better, giving a qualitative edge over the competition.
Other investments, on the other hand, are often unavoidable and are part of the company’s daily routine. Such investments are also called replacement investments. For example, it is often the case in many companies that machines in production wear out and therefore need to be replaced at regular intervals.
However, such investments can be planned and calculated by companies, which is why they are associated with significantly lower risk.
However, expansion investments such as those mentioned in the previous section are significantly more risky. On the one hand, this is due to the fact that the company is being enlarged and therefore higher sums of money have to be spent in order to maintain operations. On the other hand, the investment capital for such investments is usually significantly higher, which logically increases the risk. Likewise, the investments are usually not planned and are one-off, which makes it more difficult for companies to plan for the long term.
Investment capital with private investors
As mentioned above, the importance of investment capital for private investors is the same as for companies. What is meant is the capital that can be raised to invest in certain things that are expected to increase capital in the long term.
Especially for private investors it is essential to divide the investment capital among different investments. The higher the diversification of the portfolio, the lower the risk. In general, there are many different strategies according to which a private investor can invest his money. Thus, depending on the strategy, investments are made in different asset classes.
For example, private investors are often advised to invest a certain portion of their investment capital in precious metals, as these are relatively stable in value and thus in a way represent a safe haven of any portfolio. In addition to this low-risk part of the portfolio, it is also perfectly possible for investors to put a small part of the investment capital into higher-risk investments. For example, shares in companies that are speculated to grow at a high rate in the coming years can be used for this purpose.
All in all, it can be said in any case, especially with regard to private investors, that investment capital should always be invested as diversified as possible in order to achieve the highest possible return with the lowest possible risk.