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What is a Capital Commitment?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 29 November 2016
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A capital commitment is a financial term that can be used in two similar ways. Capital commitments can be described as the complete inventory of stocks that are in the possession of market makers. In a related manner, a capital commitment can also refer to a business decision that is made by a corporation to invest a portion of its long-term assets over a specified period of time.

In the case of relating to inventories of stock, a capital commitment can be viewed as a risk for the market maker. This is due to the fact that inventories of stocks can change in value over time. Depending on the performance of the stock market, the value of those stocks may rise, or they may fall. The risk to the market maker is that the stocks will not appreciate, which will ultimately reduce the overall value of the investment portfolio.

What this means for the market maker is that the selection of stocks to include in the inventory should be considered with a great deal of thought. By choosing stocks that are anticipated to appreciate in value, even at a modest rate, the capital commitment of the inventory is considered to be stable and therefore desirable.

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Just as with the concept of a capital commitment relating to an inventory of stocks, companies looking to invest resources in a business venture want to take steps to protect their capital commitment. This is often accomplished by employing the basics of capital budgeting. Looking into the initial outlay of resources, as well as the amount of resources that will need to be invested as the project moves toward profitability, will help the company determine if a given business project is worth the time and the money. A capital commitment, in this context, is understood to be a long-term covenant to the project. Investors usually want reasonable assurance that the project will eventually bear fruit, pay for itself, and begin to generate profit on a continual basis.

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ceejay
Post 1

Hello, Since, capital commitment can also refer to a business decision that is made by a corporation to invest a portion of its long-term assets over a specified period of time; can Capital Commitment be treated as Capital Expenditure (CAPEX) for Real Estate companies or REITs or for companies in all the other sectors? Appreciate your insight on the matter. Thanks, Ceejay

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