Advantages & Disadvantages of Issuing Stock or Long-Term Debt

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.