Capital Commitment

A bank or a brokerage firm may agree to hold certain stocks for future sale. This is a capital commitment. The downside to holding such stock is that there is a potential for devaluation.

Usually a company carrying these stocks agrees to hold them for a set period. The value of the stocks may increase the holding company profits, but such an arrangement is usually at a high-risk. Therefore, many corporate boards often push to lower their capital commitment to protect the company from a potential disaster.

In the event of a merger or the sale of a company, any excess capital tied up in such a commitment can be a detriment. No one wants to take on another company’s unsecured capital investment.

Any bank or brokerage firm wants to hold investments that can be instantly liquefied, but often they will take on risky investments as a favor or out of obligation. Sometimes such investments are made when there is a high potential for future profits.

Companies strive for profits, and sometimes compromises have to be made to ensure future deals or as a favor to another company.

A company with too much capital commitment can run into trouble if the value of the investment falls or the commitments becomes over extended. Cash flow and investments with the potential for instant liquidity is the goal any viable company strives for. No company wants to stagnate and most corporate boards keep a close eye on how their capital is being invested or utilized to its maximum potential.

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