Advantages and Disadvantages of Shares

Shares is one of the methods of raising finance for a company. There are several advantages and disadvantages of using shares as a source of finance.

Advantages

Some of the advantages of using shares as a method of financing include:

No repayment required. Unlike bank loans and debts which must be repaid in full with some interest on top, a company does not need to repay shares since they are only bought and sold in the stock market. The company may decide to distribute some portion of its profits as dividends to shareholders, but it is not mandatory to do so if the business is not doing well. This creates flexibility for a company to invest its profits on promising projects.

Lower Risk: Shares involve little risk on the part of the company issuing them. Corporations that use more equity than debt in their capital structure have a lower risk of bankruptcy. Investors are not able to force a company into bankruptcy for failing to pay dividends, but creditors will go for the company’s assets if it is not able to pay its debts.

Equity Partners: Shares allows a company to bring in equity partners who have interest in the success of the company. These partners could have a great deal of knowledge, connections, and expertise that could benefit the business. Equity partners can also pull more resources into the company for future growth.

Disadvantages

Some of the disadvantages associated with the use of shares as a source of capital include the following:

Dilution of ownership: one of the major disadvantages shares as a method of acquiring capital is that the owner loses control of their company. Shareholders are considered as owners of the company with the right to vote on major decisions of the organization. With every share of stock you sell to investors, you dilute, or reduce, your ownership stake in your small business. So let’s say for example that the original owners of Safaricom lost some control of the company when they issued shares in 2008 at the Nairobi Stock Exchange. If a business owner sells all shares of the firm, it is like selling the entire company.

High Cost: shares also come at a high cost. This disadvantage emerges from the fact that the company has to pay its shareholders with a high rate of return in order to continue selling shares. Shares tend to lose value and sell at a low price when the company is not performing well.

Time and Effort: Another great disadvantage of shares is that it takes time and effort to get investors who are willing to buy shares. It typically takes the right connections and a powerful pitch deck to get the equity you need.

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