Question

What are the pros and cons of the issuer that issues stocks and bonds?

Answer 1

Pros & cons of issuer that issues stocks & bonds:

I) Stocks :

Pros:

a) Issue of stock helps issuer to start business without borrowing. It attracts investors based on business's potential growth and profit.

b) It gives advantage of not owing any money to investors because issuer is not borrowing. Rising stock value can increase your credit rating and make it easier to borrow money in the future.

Cons :

a) Issue of shares gives each investor a piece of ownership. Company have to reveal information to shareholders as they have right to demand explanations & justifications for business decisions.

b) Issuer may have to offer monthly or quarterly dividends. If company has agreed to pay dividends, shareholders have right to dividends and if there is default on payment of dividend, then it could adversely impact on reputation & share price of the company.

II) Bonds :

Pros :

a) Bond holder's don't own piece business & they don't participate in company's decision making. Bond allows the issuer to borrow money only for the time issue will need it.

b) Issuer can issue bond whenever business need money. In case of stock, issuer issues at once because second offering of stock tend to dilute the share price due to extra issue.

Cons :

a) Issuer must pay interest on time to bondholders. But in dividend case, issuer can use the cash for expansion of business anytime but it is not possible in case of interest payment.

b) Bonds increase the amount of debt on company's books. This could be factor for investors that makes a company attractive or unattractive.