Financing with common stock serves as a reserve of borrowing capacity. Common stock financing represents the sale of ownership stakes within a corporation in exchange for cash or capital considerations. Stock financing is the sale of equity/ownership rights within a business in order to get money or capital considerations. Common stock is the most important source of long-term financing. It offers a number of advantages to the company and investors.
Advantages of Common Stock Financing From Investor’s Viewpoint
- Common stock provides a higher return to the shareholders.
- Common stockholders can participate in management using their voting rights. Thus, they can maintain control over the company.
- Common stockholders are the real owner of the company. However, they have limited liability.
- Common stock can be sold more easily than debt because it has a higher expected rate of return and it represents ownership of the firm.
- Returns from a common stock, in the form of capital gains, are subject to lower personal tax rates.
- Common stock increases the future borrowing capacity of the firm. If the equity capital is more, it becomes easier to borrow fund in future. The more the firm sells the common stock, the more its equity base. Hence it can take long-term finance more easily and cheaply than that of other alternatives.
- Common stocks have high liquidity. This indicates that stocks can be purchased and sold swiftly at a reasonable cost.