Whats the difference between capital and investment?

Capital has several meanings. A common definition is that capital is the owners' equity part of a corporation. It is the difference between assets and liabilities. Capital is the part of the corporation that represent the investment of shareholders, as contrasted to liabilities that represent the investment of creditors. You'll notice that I said capital is an investment and liabilities are investments. That is because the corporation invested the money it obtained by borrowing money and by selling its stock in assets such as land, building, equipment, inventory, and similar things of value. It puts these investments to work to earn income that it can distribute to shareholders as dividends and to creditors as interest.

Another view of capital is net worth. For an individual, it too is the difference between assets and liabilities. If you own assets with a value of $100,000 and owe liabilities of $40,000, your net worth, or capital, is $60,000. Now let's consider your investments. Of your $100,000 of assets, a part may be invested in your home, another part in some stocks and bonds, and part consists of personal property such as your wardrobe, automobile, and furniture. You may view your home as an investment from which you derive shelter and other benefits. Your stock investments provide dividends and your bond investments provide interest income. Note that your stock investments are part of the capital of some corporations, and your bond investments are liabilities of the entity that issued the bonds, possibly the same corporations or a government.

You may view your home, stocks and bonds as investments that yield a return, but you would not view your car, or food in the refrigerator as investments because these are items you are consuming. You are also consuming your home, but it is a tangible asset that retains it value and may even grow in value, whereas your furniture decreases in value as you use it up. What you consider an investment is often a point of view.

Capital, is money on hand that is readily available. Investment is money tied up in usually less than liquid assets such as property, stocks, bonds etc.

In his book, The Theory of Interest, Irving Fisher defined capital as "future income discounted". He said that "the value of capital must be computed from future income, not vise versa." In his definition, he is arguing that the value of a thing is what future income it will produce. However, these incomes must be converted, or discounted, to a present day value to reflect the time value of money. In other words, future income is not as valuble to us as present income.

Take, for example, an apartment complex. What is the value of the complex? What could an owner sell it for? Would he add up the costs of the construction and come up with a sale price? No. The value of his apartment complex is the future income it can generate from collecting rent checks. Any potential buyers will determine their price based on what they think they can fetch in rent.

Take another example. Let's say that two apartment complexes cost 1 million dollars each to contruct. Complex A is in Hicksville and fetches $400 per month in rent, the going rate for that local hick community. Complex B is in a nearby town, Richville, where apartments are rented out at $800 per month. Both complexes cost 1 million to build. However, do they both represent the same amount of capital? Certainly not. Which complex is worth more, or has "more capital"? The one that fetches higher rent. So, in this sense, the word capital is a measure of how much future income a thing will generate.

An investment is anything that has the potential to create a future stream of income. An investment is the thing itself, while capital is a measure of the investment's worth. At least, this is according to Irving Fisher.

One of the key differences between wealthy people and the rest of the crowd is that they have a proper handle on these concepts. They understand that wealth does not consist of intert assets ... wealth are things that create streams of income. They also have an understanding of the "time value of money".

To read more about this, download a free copy of my book at http://www.invest-for-retirement.com and go straight to Chapter 4.