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 Viewpoint of Issuer
- Common stock is the source of permanent capital. Funds raised from a common stock is available for use as long as the company exists.
- It carries no fixed maturity date. It represents permanent capital. Hence, there is no liability for repayment.
- It does not legally obligate the firm to pay a dividend. If a company generates sufficient earnings, it can pay a dividend to common stockholders. In contrast to bond interest, there is no legal obligation to pay dividends to common stockholders.
- Common stock financing increases the borrowing capacity of the company. Because common stock provides a cushion against losses of creditors, the sale of common stock generally increases the creditworthiness of the firm. Thus, a business firm with a strong equity base is capable to obtain loan easily and common stock strengthens the equity base of the firm.
- It is easily marketable than debt and preferred stock.
- The dividend on common stock is not fixed. It depends on the profit generated. Dividends are not the burden as in the case of preference share.