Home » Blog » FINANCE » Advantages and Disadvantages of financing through Common Stocks (Discuss A to Z)

Advantages and Disadvantages of financing through Common Stocks (Discuss A to Z)

Advantages and Disadvantages of financing through Common Stocks – Are you struggling with searching merits and demerits of common stock. Now you are in right place. A member of a join stock business or a shareholder is generally called a shareholder.

In this article briefly discussed Advantages and Disadvantages of financing through Common Stocks Let’s see-

Shareholders play a variety of roles in a joint stock company. According to the Companies Act of 1994, the rights enjoyed by the shareholders can be divided into two parts. One is the overall rights of the shareholders and the other is the sole proprietorship.

Describe the rights of ordinary shareholders:

The rights of shareholders according to the company law are discussed below:

1. Collective Rights:

Ordinary shareholders enjoy certain rights. These rights cannot be exercised by any single shareholder. Which are called collective rights.

Advantages and Disadvantages of financing through Common Stocks

These rights are shown below the right to amend the Company’s Memorandum of Understanding and Compliance Rules subject to the approval of a legally authorized authority.

i. The right to participate in the selection and removal of directors. The right to change the number of authorized shares. Right to allow sale of fixed assets.

ii. The right to attend sessions and constructive criticism.

iii. The right to integration.

iv. The right to receive minutes of the general session of the company.

v. Priority shares, right to issue bonds.

2. Specific Rights:

Under the Companies Act, ordinary shareholders have a number of specific rights, such as sole proprietorship. The rights are as follows:

i. The right to receive dividends.

ii. The right to exercise the right to vote on any issue.

iii. The right to transfer shares at any time.

iv. The right to collect copies of company memoranda and parcel rules.

V. Members have the right to view or inspect the registrar’s book.

In addition to the above company law rights, they also enjoy a special privilege based on priority. The key to priority rights is for the company to give priority to the old shareholders when issuing new shares.


Advantages and Disadvantages of Financing Through Common Stock:

Ordinary shares play an important role as a source of funds for any business organization, especially a company. It is considered the first and foremost financing of the organization.

Advantages Of Common Stock:

Ordinary shares are one of the sources of long term financing for the following benefits.

1.No fixed cost:

There is no fixed cost for ordinary share capital. This is the only source for which the organization does not have to bear any fixed cost. If the company makes a profit, the question of dividend distribution arises. Paying dividends is not mandatory in this case. But in the case of bonds, interest must be paid whether it is profitable or not.

2. No repayment period:

There is no repayment period for ordinary share capital. Funds collected do not need to be returned during the lifetime of the organization.

3. Control:

The current management has control over the raising of funds through shares. It also reduces the instability and instability of management. If ordinary share income is taken in the form of capital gains, less personal income tax is levied on it. On the other hand, high income tax has to be paid on the income received from debentures.

Disadvantages Of Common Stock:

In addition to the advantages of ordinary shares, the following disadvantages are observed:

1. Increased voting rights:

New shareholders gain voting rights and participate in the regulatory process by financing through ordinary shares. For this reason, new and small companies are reluctant to finance through shares.

2. Profit Participation:

Ordinary shares allow more people to participate in profits. Hence, in case of loan, the institution has to bear only fixed cost.

3. Distribution Cost:

The cost of distribution and underwriting of ordinary shares is generally higher than other sources.

4. Average Capital Expenditure:

If the equity capital is excess, the overall average capital expenditure of the firm is higher.

5. Tax benefits:

Dividends on ordinary shares are not allowable expenses. On the other hand, interest on bonds allows the cost of bonds to be lower as a result of the allowable cost.

From a social point of view, ordinary shares are a desirable source of finance. Because it provides a huge financial benefit to an organization. The company does not pay dividends if its sales and profits decline. Related:

What is the Definition of Leverage: [A to Z Explain Financial Leverage],
Break – Even Point Analysis A to Z, Goal of the financial manager, What Is Bond? Discuss A to Z and, Advantages And Disadvantages Of Time Value of Money. Definition of Time Value of Money & Importance Of Time Value Of Money. Describe The Preferred Stock A To Z. Method Of Selling Shares on a company A to Z.

Because in this case paying dividend is not mandatory in this case. Hope enjoyed Advantages and Disadvantages of financing through Common Stocks. Yet if you have any question, Don’t hesitate to contact us, we are ready to help you.