The Effects of Issuing Common Stock

Save

When a company issues common stock to the public, it can have a number of effects both positive and negative. Issuing this stock can impact the company as well as the shareholders in that company. The company can quickly generate money that it can use, but it also creates extra obligations.

Provides Money With No Debt

One of the advantages of issuing common stock is that it provides money that the company can use immediately without taking on extra debt. This gives the company money to expand without burdening it with another loan payment. The company never has to worry about paying the money back over time as it would if it took out a traditional loan. This gives the company extra financial flexibility and keeps it from becoming over-leveraged in the short term.

Diluting Existing Stock

One of the potential problems of issuing common stock is that it can dilute the level of ownership for the existing stockholders. When a company continues to issue more and more stock, it makes the existing stock less valuable. If you are an existing shareholder in a company, you may not like to see more shares being issued. This makes your initial investment less valuable and it means that you have less ownership in the company overall.

No Restrictions

One of the advantages of issuing common stock is that it can provide a company with money that does not have any restrictions associated with it. By comparison, when you borrow money, sometimes the lender will restrict the possible uses for the money. This can essentially tie the corporation down to specific actions and limit its effectiveness. When you raise money through issuing stock, you can use the money as needed, without having to worry about any stipulations.

Taking on Partners

When you issue stock in the company, you are essentially taking on business partners. Each person who buys a share of stock is becoming a partial owner in the company. While you don't necessarily have to repay these owners according to strict terms, they do expect to receive some of the profits in the future. This cuts down on the amount of profit that you can expect to get from business activities over the years. You also have to continually worry about pleasing the shareholders.

Related Searches

References

Promoted By Zergnet

Comments

Related Searches

Check It Out

Are You Really Getting A Deal From Discount Stores?

M
Is DIY in your DNA? Become part of our maker community.
Submit Your Work!