FINANCE_1234

A company has different ways of financing itself. They can obtain their money from banks, issuing shares or stocks and issuing bonds.

The companies can borrow money from the bank. This type of funding has several disadvantages, because that money that they lend you is not free. You have to pay a tax, and sometimes that tax is so high, that makes it very expensive to borrow money from the bank. But it also has an advantage; it is easy to receive the money (it depends of the financial situation of the company) and they normally give it immediately.

Issuing shares or stocks are the most common way of finance. A share is a unit of account for various financial instruments including stocks and investments in limited partnerships. The income received from shares is called dividend, and people owning shares are called shareholders.

Buying a share gives its holder part of the ownership of a company. Shares generally entitle their owners to vote at a company´s Annual General Meeting and to receive a proportion of distributed profits in the form of a dividend. This are the advantages since the point view of I buyer. The only disadvantage that I note is the risk of share´s devaluation. And the only risk for the company is the volatility of the market´s prices.

On the other hand, a company can issue bonds. The advantage of debt financing over equity financing is that bond interest is tax deductible. But it also has a disadvantage; bond interest has to be paid, even in a year with without any profits. For the buyer, the advantage is that he receives the same amount of money every year and the problem is that you cannot sell them.

Besides all that, companies finance most of their activities by way of internally generated cash flows.

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