Stocks And Bonds – Disadvantages Of Issuing Stocks And Bonds
A company is capable to earn money by issuing bonds or the shares of stock. When we talk about the shares of stock, we come to know that they are the essential part of the company and these shares provide a right to the holders to share the profits of the company. In some specific cases, the right of vote casting related to the company’s direction is also granted to the shareholders. On the other hand, there are bonds. Bonds are actually the part of loans that a company agrees to pay back over some period of time. Issuance of stocks and bonds has a lot advantages but at the same time it has some disadvantages too. These disadvantages are as follows.
1. Loss of power:
It is a matter of fact that when a company issues its bonds and stocks, it provides fractional control to the outsider parties. Stockholders own the stock of the company so this possession allows them to vote on some specific issues and they have a strong voice in each and every discussion regarding the working of that company too. Before the distribution of stocks, the control resides in a few hands whereas after the issuance of bonds and stocks, it gets distributed among a lot of people.
2. Disclosure of Assets:
It has been witnesses in many countries including U.S. that the companies have to follow some rules regarding the disclosure of certain financial information before issuing their stocks and bonds to other people. The companies that issue their stocks must present quarterly reports regarding the financial health of the business. And the companies that issue bond must render the complete information regarding the purpose of issuing the bond.
3. Potential of takeover:
The companies may have to face the situation of takeover in case of issuing more stock. If a shareholder is capable enough to buy the bulk of voting shares, he efficiently handles the company. Sometimes the shareholders lost their business in an attempt to secure the future of the company.
4. Loss of value:
When a company offers its bonds and shares to the public, it welcomes the people for the open evaluation of value. If it happens that a sudden decrease in the price of the shares of a company occurs, it represents the lack of the confidence of the investors. So the loss of value occurs. If a company does not issue bonds and stocks, its secrets remain with it and the public remain unaware about them.
5. Responsibility comes to Stakeholders:
It is a matter of fact that the stockholders and the bondholders have a great stake in the success of a company. There was a time when a company was responsible for its employees, its customers and to its owners only but now the trend is changed. Now it is responsible to satisfy the various demands of its bondholders and the shareholders. This thing can change the basic focus of the company that is planning for the future and diverts its attention toward the satisfaction of the bond holders.