rebeccael28
Badges: 15
Rep:
?
#1
Report Thread starter 4 years ago
#1
Could anyone help I'm a bit confused..
I'm revising the topic of sources of finance.
Why is it beneficial and difficult to raise finance through selling shares?
Thanks


Posted from TSR Mobile
0
reply
LGBTvoice
Badges: 18
Rep:
?
#2
Report 4 years ago
#2
(Original post by rebeccael28)
Could anyone help I'm a bit confused..
I'm revising the topic of sources of finance.
Why is it beneficial and difficult to raise finance through selling shares?
Thanks


Posted from TSR Mobile
It's good because it will provide the business with essentially "free" investment as the shareholders choose whether to invest and it'll increase their share capital, boosting share price and making the stock exchange more competitive.

Per contra, the shareholders are not compelled to buy shares and so if the business is performing well, they may choose not to invest or sell off their shares, decreasing share price and thus market capitalisation - leaving the business with less finance this way. Shareholders may also expect dividends in return which affect profits.

Hope this has helped. Let me know if you need any help on business at all. I'm just a DM away


Posted from TSR Mobile
0
reply
RogerOxon
Badges: 21
Rep:
?
#3
Report 4 years ago
#3
(Original post by taichung)
Stop bickering boys and girls, when you put £33,000 in the market (like me) then you will understand how the damn market works.
You are confusing understanding with (limited) experience.

I have a lot, lot more in the market than you, but would not claim to understand it. If you look at the performance of managed funds, there are still plenty that under-perform the relevant indices. There's also a random element to events that affect the market, so any understanding only gets you so far.
0
reply
natninja
Badges: 21
Rep:
?
#4
Report 4 years ago
#4
(Original post by LGBTvoice)
It's good because it will provide the business with essentially "free" investment as the shareholders choose whether to invest and it'll increase their share capital, boosting share price and making the stock exchange more competitive.

Per contra, the shareholders are not compelled to buy shares and so if the business is performing well, they may choose not to invest or sell off their shares, decreasing share price and thus market capitalisation - leaving the business with less finance this way. Shareholders may also expect dividends in return which affect profits.

Hope this has helped. Let me know if you need any help on business at all. I'm just a DM away


Posted from TSR Mobile
(Original post by rebeccael28)
Could anyone help I'm a bit confused..
I'm revising the topic of sources of finance.
Why is it beneficial and difficult to raise finance through selling shares?
Thanks


Posted from TSR Mobile
Firstly LGBTvoice, thank you for contributing and trying to help out a fellow TSRian copied you in as I feel while you understand shares from an investors perspective and within the context of secondary markets, you don't understand them from the perspective of a company. OP, hope my response isn't too late for it to be useful - have been working some crazy hours lately.

The main advantage of raising capital through equity financing is that it is stable long term financing with no obligations for payment. This means that it is cheaper, in cash terms only, than financing via debt. Additionally, there is no interest rate risk from equity financing (generally speaking) or other financial management risks.

On the flip-side, the cost of capital for financing with equity is significantly more than debt financing as it is risky for investors and they therefore expect a return on their investment (coming from a common sense perspective, if you lend to a company you take on less risk than if you invest in equity and therefore debt financing must be cheaper for the company). Additionally, unlike debt finaning where interest and principle repayments are tax deductible, dividends on shares paid to investors are not (FYI dividends don't affect profits as they are paid from distributable reserves of the company from accumulated prior years profit, debt finance on the other hand directly hits PBT). The other main disadvantage of raising equity finance is dilution, if more shares are issued, each share has a reduced claim on the net assets of the company on liquidation and a reduced share in its profits and therefore the shares are worth less to investors.

For these reasons, raising equity finance is harder than debt financing. Primarily because existing shareholders may be resistant to issuing new equity (and unless specified in the articles of association, under UK company law, without shareholder approval a new allocation will not be permitted) and because new shareholders will be taking on a risk. It is also hard to get the amount of financing you want for the equity you are willing to issue, especially if you are not listed and there is no active market in your shares.
1
reply
X

Quick Reply

Attached files
Write a reply...
Reply
new posts
Back
to top
Latest
My Feed

See more of what you like on
The Student Room

You can personalise what you see on TSR. Tell us a little about yourself to get started.

Personalise

If you haven't confirmed your firm and insurance choices yet, why is that?

I don't want to decide until I've received all my offers (3)
50%
I am waiting until the deadline in case anything in my life changes (2)
33.33%
I am waiting until the deadline in case something in the world changes (ie. pandemic-related) (1)
16.67%
I am waiting until I can see the unis in person (0)
0%
I still have more questions before I made my decision (0)
0%
No reason, just haven't entered it yet (0)
0%
Something else (let us know in the thread!) (0)
0%

Watched Threads

View All