Advantages & Disadvantages of Issuing Stock or Long-Term Debt


Advantages & Disadvantages of Issuing Stock or Long-Term Debt

John Smith
| February 24, 2020 Last Updated 2020-02-25T07:10:36Z

Definition: What are stocks?

Stocks are a kind of financial investment. To raise capital, companies, and corporations issue shares in the market. These shares represent the ownership percentage of the buyer in that company. The value of these shares keeps on fluctuating. Investors buy the shares of that company which, according to them, have a brighter future and whose share prices are expected to increase over time. As a result, the investor can earn profit by selling the shares.

How to make money in stocks?

On the one hand, stock investment is considered the riskiest form of investment. Whereas, on the other hand, the profit margin is much higher in stock investment as compared to other investments.

There are two ways in which an investor can make money in shares:

-        By selling the shares when the market price of the share is higher than the price at which the investor bought them. Another way to earn money in shares is through dividends. Some companies make a regular payment to their stockholders. This regular payment is known as a dividend. Remember, every stock does not deal with the dividend. Generally, dividends are paid quarterly.

-        Having an online brokerage account is mandatory if you want to deal in stocks. Once the account is opened, you are ready to trade. Online brokers charge a commission for their services. This commission varies from company to company. Hence, it is advisable to go for window shopping, compare the benefits, offers, and the commission charged of various online brokers, before going for actual account opening.

Why Does a Company Issue Stock?

A company issue stock to raise capital. For example, if a company wants to go for expansion but does not have sufficient capital to support its plan, it may decide to issue stock. Also, the amount of the required capital is so high that the private financial institutions may not be able to offer the kind of financial assistance required by the company. Hence, issuing stocks turn out to be the best solution.

For this, the company needs to register itself as a publicly-traded company and go for an initial public offering. By issuing stock, companies give up ownership. By purchasing stock of a company, the investor actually buys a part of the ownership of that company.

Advantages of selling Common Stock

Shares represent the investor's ownership in the company. Hence, by issuing the stocks, the company is actually giving the investor a right to vote on certain business matters. Besides this, the investor also gets the right to share some percentage of the company's profits.

The major advantage of selling common stock is the ability of the company to conserve cash. The selling of common stocks also enables the company to bring other qualified people into their company. As the investor owns a part of the company's ownership, they would like to see the company growing and hence, would offer their resources and services to facilitate the growth of the company.

Disadvantages of Issuing Common Stock

The first and the biggest disadvantage of issuing common stock is that the company gives away a part of the ownership. More the issuing of common stock, the lesser would be the percentage of the ownership left with the company.

Advantages of Debt

The biggest advantage of taking long-term debt is that the company does not have to part with its ownership. If a company needs to raise capital but does not want to give away the ownership, then long-term debt would be the best option.

Another benefit of debt is that the company can repeat the process every time it is in need of money. Whereas in the case of issuing stocks, the company can sell stocks only for a limited period as after some time, there would not be any ownership left that can be offered to the investors.

Disadvantages of Debt

The biggest disadvantage of long-term debt is the cost associated with it.

In the case of long-term debt, companies need to pay back the debt amount along with a hefty interest. These payments can either be in the form of monthly payments or bond coupons. In both cases, the company's future earnings get tied up, and this further hampers the growth prospects of the company.

Also, in case of a debt, a company may lose its freedom to invest more money in its business or might not be able to buy an asset. It is because they need to have enough money to pay their loan instalment or bond coupons.

Another disadvantage of taking a loan is its effect on the credit rating. Higher the debts more will be the pressure on the business's credit rating. Any default at your part may hamper the company's credit rating to such an extent that credit repair would take a very long time.

The Conclusion

Both stock issuing and debt have their pros and cons. Generally, a company goes for issuing stock when the amount of capital required is very high. It may be for purchasing new equipment, buying an asset, or hiring employees.

Author Bio:

Focused on providing information for anyone in need of debt relief, Jackson writes a blog on debt settlement, debt consolidation, tax debt relief and student loan debt which helps to find the debt solution that fits their unique needs no matter the amount of debt they are in.
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