WHAT IS THE ORIGIN OF CAPITAL? FINANCING AND LISTING - ECONOMY - 2025

The origin of capital is the source of the money required by a company, by some type of investor. It is the most popular mode of financing for a business, because capital can be generated internally by the business.

Capital is the money that is paid into the business, either from the owner or contributed by one or more investors. Capital investments are certified by issuing shares in the company.

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The shares are issued in direct proportion to the amount of the investment so that the person who has invested most of the current money controls the company.

Investors put money into a company hoping to share in its profits and hoping that the value of the stock will appreciate. They can earn dividends, but they can also get the value of the stock back just by selling it.

The company saves a lot on the cost of interest by not opting for debt financing. By carefully planning the source of capital, the entrepreneur can ensure the growth of his business without diluting his majority stake.

Capital financing

Every organization needs funds to function and it does so by raising capital. When capital is raised by selling shares in the company, it is called equity financing. Through equity financing, a stake in the company is being sold to raise funds.

Small business equity financing is available from a wide variety of sources.

Possible sources of capital include the entrepreneur's friends and family, private investors (from the family physician or groups of local business owners, to wealthy entrepreneurs known as "angels"), employees, customers, and suppliers.

There are also venture capital firms, investment banking firms, insurance companies, large corporations, and small government-backed investment firms.

Start-up operations, seeking so-called 'top tier' funding, almost always have to rely on friends and 'angels' - that is, private individuals, unless the business idea has explosive potential.

List of origins of capital

Angel investors

They are wealthy people who put their money in high-growth businesses, which have the potential to generate higher returns in the future, in exchange for the purchase of a stake in the business.

Some invest on their own account or also as part of a network. Investors are usually experienced entrepreneurs. In addition to money, they bring their own skills, knowledge, experience and contacts to the company, thus helping the company in the long term.

Risk capital

Venture capital is most often used for high-growth companies intended to be sold or floated in the stock market. It is also known as private equity financing.

Therefore, venture capitalists are those investors who invest in businesses that are expected to grow at a rapid pace and that may be listed on the stock exchanges in the future.

They seek to invest higher sums of money than angel investors, in exchange for a larger equity stake in the company.

Closed investment companies

They are similar to venture capital firms, but have smaller or fixed (closed) amounts of money to invest. These companies sell shares to investors and use the proceeds to invest in other companies.

Closed companies usually focus on high-growth companies with good records, rather than startups.

Crowdfunding

Crowdfunding is the methodology where several people invest, lend or contribute small amounts of money for a business or idea. This money is combined to help meet the funding goal.

Each person who endorses the idea will generally receive rewards or financial gain in return. People invest in companies because they believe their ideas and expect higher returns in the future.

Institutional investors

Institutional investors include mutual funds, insurance companies, pension funds, etc.

These agencies have large amounts of money with them and make certain investments in private companies.

Retained earnings

A company can be financed by withholding its earnings, rather than distributing it to shareholders as a dividend. This is a part of the owner's equity.

In this way, the company is not obliged to seek other sources of equity financing, as it has an inherent solution. The company can increase equity by issuing bonus shares to its shareholders.

Corporate investors

Corporate investors, in the form of large organizations, invest in private companies to meet their financial needs.

The investment of large corporations in such companies is primarily to develop a strategic partnership or corporate partnership.

These investors create a network of companies that invest in different companies, in different periods of time.

Stock market

Joining a public or stock market is another avenue through which equity funding can be increased.

A listing on the stock market can help companies access capital for growth and obtain financing for further development.

Well-established companies can obtain equity financing by filing an initial public offering (IPO) of the company. With an IPO, the company can raise funds by offering its shares to the public.

Many institutional investors also invest in the company's IPO. The company uses this type of equity financing when it has already used other sources of capital origin. The reason is that an IPO is an expensive and time-consuming source of equity financing.

Business investment scheme

Some limited companies can raise funds under the Enterprise Investment Scheme (EIE). This scheme applies to small companies that carry out a qualified commercial activity.

There are potential tax advantages for people who invest in such companies, such as:

- The buyer of the shares gets a 30% income tax relief on the cost of the shares.

- Tax on capital gains from the sale of other assets can be deferred if the gain is reinvested in EIE shares.

Certain conditions must be met for a business to be a qualified company and for an investor to be eligible for tax relief.

References

1. NI Business Info (2019). Equity finance. Taken from: nibusinessinfo.co.uk.
2. Sanjay Bulaki Borad (2018). Sources of Equity Financing. E-Finance Management. Taken from: efinancemanagement.com.
3. Inc (2019). Equity Financing. Taken from: inc.com.
4. Smriti Chand (2019). 5 Essential Sources of Equity Financing - Company Management. Your Article Library. Taken from: yourarticlelibrary.com.
5. Caroline Banton (2019). Equity Financing. Investopedia. Taken from: com.