What are the advantages and disadvantages of common shares?

Question

Advantages and disadvantages of common shares

Answer 1

Advantages of common shares;

• A company is not legally obliged to pay dividend and therefore in times of financial difficulties, it can reduce or suspend common dividends.
• They have no maturity date, the company has no liability for cash outflow associated with the redemption of common shares.
• The issue of common shares increases the company's financial base and thus its borrowing limit increases since lenders usually provide capital in proportion to the company's equity.

Disadvantages of common shares;

• The issue of new shares dilutes the shareholders earning per share usually because profit does not increase immediately in proportion to the increase in the number of common shares.
• Common shares have a higher cost.
• The issue of shares also dilutes the ownership and control of existing shareholders.