What is a Capital Requirement?

A capital requirement is the amount of resources that are necessary to sustain the day to day function of a business. In many countries, government regulations require that in order for a company to engage in the business of banking or investments, the brokerage or dealer must demonstrate that it is capable of maintaining a continued operation over the long term. Without this basic capital requirement, the company is not able to entertain the possibility of dealing in stocks, bonds, money markets, or other investments as part of its future growth strategy. In the United States, the Securities and Exchange Commission sets the standards for meeting basic qualifications of capital requirement.

There are several advantages of having a capital requirement in place. First, the necessity of a capital requirement provides a valuable safeguard for potential investors. By preventing a company from trading stock or bonds unless there is a considered expectation of the continued function of the business, it is possible for the investor to have a reasonable chance of making a return on his or her investment.

Companies also benefit from the establishment of a capital requirement within the country of origin. Potential investors are less likely to be diverted to other investment opportunities that look good, but lack any real substance. Businesses that are able to meet and maintain a capital requirement are able to present an established record for operation, have less worries about staying in business, and usually have the vision to develop goals that will strengthen the company in years to come.

Another important product of a capital requirement is that the national economy benefits from setting standards that must be met in order for trading to take place. By limiting the investment options to offers that have a reasonable amount of stability, the country helps to encourage the act of investing. Money circulating through the national economy ultimately benefits all the citizens of the nation by helping to keep businesses running, people employed, and essential goods and services at competitive prices.