There are mainly three stages of capital formation, which are given below:
(i) Savings : The basic factor on which capital is created is savings. The ability to save depends on the income of a person. Higher savings generally follow higher earnings. A rich country has more potential than a poor country and can get rich from it soon. It is not only the ability to save, but also the desire to save, which is of great importance. Desire depends on the person’s concern about his future as well as the social order in which he lives.

(ii) Mobilization of Savings : It is not enough that people want to save money, what is essential is that the saved money enters circulation and facilitates the process of capital formation. To collect public savings, banking and other financial institutions should have a broad network and their services should be accessible to the potential investor.

(iii) Investment: The process of capital formation is completed, when the actual savings are converted into real capital assets. There should be an entrepreneurial class of an economy that is ready to bear the risk of business and to utilise savings in productive opportunities so that it can create new capital assets.