Common Stock and Market for the Common Stock
Common stocks are not activity traded, they are owned by only a few people, usually the companies, manager. Such a firm is said to be closely held or privately owned, corporation. In contrast, the stocks of most larger companies are owned by a large number of investors, most of whom are not active in management. Such companies are said to be publicly held corporations. Stocks of smaller publicly owned company and closely held company are generally traded in the over the counter (OTC) market. But the stock of larger publicly owned companies is generally traded on an organized stock exchange.
Advantages of Common Stock
The Major advantages of common stock are as follows:
Advantages of Common Stock Financing from Company’s Point
The funds rise through common stock need to be repaid.
- It does not involve any fixed obligation for payment of dividend.
- It enhances the creditworthiness of the company.
- Common stocks are the sources of permanent capital since they not have a maturity period.
Common stock can any times be sold more easily than debt or preferred stock.
Advantages of Common stock financing from an investor’s viewpoint
- It refers to a representation of an ownership interest in a company/firm.
- Common stockholders enjoy the controlling power of the firm.
- If the company were very successful, there return would be higher than other liabilities.
- The liabilities of common stockholders are limited to the extent of their capital contribution.
Disadvantages of Common Stock
The major number of disadvantages of common stock are as follows:
A disadvantage of common stock financing from the company’s
- The cost of issuing common stock is generally higher than the cost of debt or preferred stock.
- Equity shares are redeemed only in case of winding up the company.
- The new shareholders can interference in the control of management.
- The new shareholders participated fully in earnings and dividend.
- Common stock dividends are not tax-deductible.
- In the case of overall capitalization, the company can not redeem the common stock.
Disadvantages of common stock financing from an investor’s viewpoint
- If the companies are not successful, common stockholders may incur a heavy loss too,
- Common stockholder’s rate of return is not fixed.
- Common stockholders have a residual claim to income as well as assets.
- Chances of changing the value of shares.
The Market for Common Stock
Some companies are so small that their common stocks are not activity traded, they are owned by only a few people, usually the companies, manager. Such a firm is said to be closely held or privately owned, corporation. In contrast, the stocks of most larger companies are owned by a large number of investors, most of whom are not active in management. Such companies are said to be publicly held corporations. Stocks of smaller publicly owned company and closely held company are generally traded in the over the counter (OTC) market. But the stock of larger publicly owned companies is generally traded on an organized stock exchange. A firm raises equity capital by selling stocks in the market is called primary and initial public offering (IOP) market but trading outstanding stocks market is called the secondary market.
You May Like:
Over-the-counter (OTC) Market: The stocks of smaller publicly owned firms are not listed on an exchange. They trade in the over-the-counter (OTC) market, and the companies and the companies and their stocks are said to be on the list.
Organized Security Exchange: The stocks of larger publicly owned companies generally apply for listing on an organized security exchange, and they and their stocks are said to be listed.
Primary Market: The market in which firms issue new securities to raise corporate capital is called the primary market. Newly established firms privately held firms as well as publicly owned firms issue securities in the primary market.
Secondary Market: The market in which used stocks are traded after they have been issued by a corporation is called the primary market. Well established and publicly owned companies outstanding shares are actively traded in the secondary market.
Initial Public Offering (IPO) Market: The market for the stock that is just being offered to the public is called the initial public offering (IPO) market. For the issue of securities there are two ways of offering:
- Traditional Underwriting: Under traditional underwriting investment banking firms purchases the securities from the issuing company and then sell them to the wide ranges of investors. If the investment banker is not able to sell the securities to an investor, then investment banked has to bear the loss or the issuing company is relieved from the risk of not being able to sell the securities.
- Self Registration: For traditional underwriting, method company has to wait for a long time to complete the process with securities and exchange commission. So the company may use the self-registration method to reduce time. The company is simply required to submit the amendment to SEC and company can sell new securities in different lots as per the convenience. Therefore, this method is flexible for the issue and floatation cost is also lower.