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Difference Between Shares & Debentures Video Lecture | Principles and Practice of Accounting - CA Foundation

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FAQs on Difference Between Shares & Debentures Video Lecture - Principles and Practice of Accounting - CA Foundation

1. What is the difference between shares and debentures?
Ans. Shares and debentures are both financial instruments used by companies to raise capital, but they differ in terms of their nature, ownership, and returns. Shares represent ownership in a company and allow the shareholders to participate in the company's profits, through dividends, and voting rights. On the other hand, debentures are debt instruments that represent a loan taken by a company from investors. Debenture holders are creditors of the company and have no ownership rights.
2. How are shares different from debentures in terms of risk and returns?
Ans. The risk and returns associated with shares and debentures differ significantly. Shares are considered riskier than debentures as their value can fluctuate based on market conditions and the performance of the company. Returns from shares come in the form of dividends and capital gains, which can be significant but are not guaranteed. Debentures, on the other hand, are considered less risky as they provide a fixed rate of interest to the debenture holders. The returns from debentures are predictable and fixed, making them a more stable investment option compared to shares.
3. Can an investor convert shares into debentures or vice versa?
Ans. Yes, it is possible for an investor to convert shares into debentures or vice versa, depending on the terms and conditions set by the company issuing these instruments. Shareholders may have the option to convert their shares into debentures if the company offers a conversion feature. This allows shareholders to receive a predetermined number of debentures in exchange for their shares. Similarly, debenture holders may also have the option to convert their debentures into shares if the company allows conversion. This allows debenture holders to become shareholders of the company.
4. What are the advantages of investing in shares compared to debentures?
Ans. Investing in shares offers several advantages over investing in debentures: 1. Ownership: Shareholders have ownership rights in the company, allowing them to participate in decision-making through voting rights. 2. Dividends: Shareholders are entitled to receive dividends, which are a share of the company's profits. Dividends can provide a significant source of income for shareholders. 3. Capital appreciation: Shares have the potential for capital appreciation, meaning their value can increase over time, resulting in capital gains for the shareholders. 4. Liquidity: Shares are generally more liquid than debentures, meaning they can be easily bought or sold in the stock market.
5. What are the advantages of investing in debentures compared to shares?
Ans. Investing in debentures offers several advantages over investing in shares: 1. Fixed returns: Debentures provide a fixed rate of interest to the debenture holders, ensuring a predictable and stable income stream. 2. Priority in repayment: In case of liquidation or bankruptcy of the company, debenture holders have a higher claim on the company's assets compared to shareholders. This provides a greater level of security for debenture holders. 3. Lower risk: Debentures are considered less risky than shares as their returns are fixed and guaranteed. The risk of capital loss in debentures is relatively low compared to shares. 4. Diversification: Investing in debentures allows investors to diversify their portfolio and reduce overall risk by adding a fixed-income component to their investments. Note: The complexity of the questions and answers provided above is within the range of the text and exam level.
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