Capital Investment Defined

Capital Investment can be defined as the use of money for the purpose of investing in order to earn a profit and therefore, capital formation refers to the process of creating new money. The process of capital formation is not something that can happen without any investment, therefore, it can be said that without any investment, capital formation cannot take place. For example, if no one invests in a business then there would be no profit or growth in that business and therefore, capital formation has nothing to do with money at all! However, it is quite difficult to make investments without any investment. Therefore, in order to make investments without any investment, you have to look at other methods of creating new money. Such methods may include borrowing money from others, property, investments in shares etc.

There are two basic types of capital investments, namely, variable and fixed capital investments. Fixed capital investments include long term liabilities like plant and machinery, long term assets such as buildings and equities like shares. Fixed capital investments help in achieving the long term growth of the economy but at the same time they create new wealth by replacing the current production. On the other hand, variable capital investments refer to new wealth creation.

When you are planning to make capital investment decisions then you should first estimate the amount that you need to save for the next five to ten years. Your savings rate will depend on your income, savings objectives and your lifestyle. Therefore, it is always important to balance your budget with your capital needs in order to reach a healthy investment decision-making. You should also consult your financial advisor so that he can give you an advice on how much savings you should be making.