Common stock is the most important source of long-term financing. It offers a number of advantages to the company and investors. The merits of using common stock as a long-term financing are as follows:
Advantages Of Common Stock Financing From Viewpoint Of Issuer
1. Common stock is the source of permanent capital. Funds raised from common stock is available for use as long as the company exists.
2. Common stock does not legally obligate the firm to pay dividend. If a company generates sufficient earnings, it can pay dividend to common stockholders. In contrast to bond interest, there is no legal obligation to pay dividends to common stockholders.
3. 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 credit worthiness of the firm. Thus, business firm with strong equity base is capable to obtain loan easily and common stock strengthens the equity base of the firm.
4. Common stock is easily marketable than debt and preferred stock.
Advantages Of Common Stock Financing From Investor's Viewpoint
1. Common stock provides higher return to the shareholders.
2. Common stockholders can participate in management using their voting rights. Thus, they can maintain control over the company.
3. Common stockholders are real owner of the company. However, they have limited liability.