Question

Companies sell common stock to raise long-term capital. What are the pros and cons of selling stock? Is it better to sell common or preferred stock? Why?

Answer 1

The pros and cons of selling stock :-

PROS

• The major advantage of selling stock is that the company now do not have any new debt. Also, loan financing requires repayment and interest payment.Companies with too much debt leverage could phase business failure or even bankruptcy.
• Another advantage of selling stock is that there is shared risks i.e even if the business fails even then also you do not have to pay money back to the investors.

CONS

• By selling common stock to raise fundw is that you also give up some level of ownership. By selling too much common stock to get investment can become frustrating when your profits, from your Idea and hard work is diminished.
• Another disadvantage of selling stock is along with the loss of ownership you can also lose some control over your business through equity financing.

It is better to sell preferred stock over common stock because preferred stock takes prejudice over common stock shares which usually means preferred stocks are paid first on sale of the company.