Many companies choose to issue stock to investors. A share of stock is essentially an ownership stake in the company that issued it. When a company issues stock, it is essentially selling a piece of itself to investors. The stock can then be resold many times, with the price of the stock fluctuating due to changes in demand for it and the perceived value of the company that issued it. Issuing stocks is usually done to raise capital, but is has some drawbacks.
Advantage: Raising Capital
The main advantage of issuing stock is that it allows a company to raise capital. There are a number of ways that a company can raise capital, such as by taking on money from venture capital firms or borrowing. Stock is relatively pain-free compared to a number of other methods, as the company does not have to pay interest on this capital, nor do investors expect repayment in the near future, as some private investment companies do.
Advantage: Less Debt
Another advantage to the practice of issuing shares is that it will often prevent a company from taking on debt. Often, when a company does not have enough money to finance its operations, it will have to go into debt. By issuing stock, the company prevents this. This not only saves on interest payments, but it also makes the company appear more financially secure.
Disadvantage: Division of Profits
Perhaps the main disadvantage of issuing stock is that the company, once owned only by a select group of people, must now share its profits with a wider pool of investors. Many companies issue profits in the form of dividends. In exchange for raising capital, the company's original owners lose much of the money they would otherwise have earned through revenues.
Disadvantage: Loss of Control
Shareholders are part owners in a company. This gives them a number of rights with regard to how the company is run. Not only are companies that issue shares usually required to be more transparent, issuing financial data on a regular basis, but they must allow shareholders to vote on certain issues. This means that, in addition to surrendering profits, owners must surrender a certain amount of control in the company, too.
- "Economics"; Roger A. Arnold; 2009