Sunday, July 25, 2010

Disadvantages of Issuing Ordinary Shares

• There will be a higher cost because the company which is issuing the shares will have to prepare a document call a ‘prospectus’ inviting general public to purchase shares of the company. The company will have to advertise which will lead to a cost to the company. The company may enter into an underwriting agreement where the company which provides the underwriting agreement will agree to purchase any shares not taken up (subscribed) by the investors.

Generally the underwriters would charge 2.25% of the value of the shares issued by the company. This amount should be paid irrespective of whether the shares are subscribed by the investors or not. In addition the company may have to obtain legal advice for which there can be a cost.

• Loss of Control due to issue of shares the company may find its original shareholders loosing the control within the company.

• It will be time consuming to issue shares because the company will have to prepare the necessary documents, advertise and carry out the share issue if it is to be successful.

• Due to the ordinary shareholders taking a higher risk they should be compensated with a higher return which will lead a higher cost to the company. This will lead to high cost of capital.

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