Benefit of Stock Issuance

Benefit of Corporate Financing Using Stock

Before one begins the process of becoming a corporation, financing the start up of the company is on the top of the list. There are many ways in which a company can finance their start up costs, but the focus of this report is on the issuance of stock. The differences in the types of stock available will be discussed including common, preferred, and convertible preferred stocks. Based on the following information, the benefit of financing a corporation by the offer of stock will be presented as a positive choice.

Common Stock

Common stock “represents the ownership interest of the firm” (Block & Hirt, 2008, p. G2). These stockholders carry the rights to control direction of the corporation in regard to major policy issues through a voting process known as proxy voting. Additionally they have the right to elect the Board of Directors for the corporation. In most cases, one share of stock will equal one vote. The owners of this type of stock also receive two main benefits: capital appreciation (increased value from the market) and dividends. Dividends are not as common for this type of stockholder since these are paid from the retained earnings of the corporation. If there are not any retained earnings (i.e. quarterly loss instead of profit) there is no money available for the dividend. Additionally, preferred stockholders receive dividends first. The final benefit for this type of stockholder is the opportunity for the first option to purchase new shares of stock.

Preferred Stock

Preferred stock is “a hybrid security combining some of the characteristics of common stock and debt” (Block & Hirt, 2008, p. G11). This type of stock does not have the same rights as the common stock in terms of voting rights, or even the guarantee of dividends. The corporation may forgo the dividends if it deems necessary. Dividends must be paid to preferred shareholders before common stockholders if any are paid however. The greatest...