Question

Explain two type of equity instruments indicating their keys distinct features

Answer 1

Defining equity instrument-

An equity instrument refers to a document which serves as a legally applicable evidence of the ownership right in a firm, like a share certificate. Equity instruments are, generally, issued to company shareholders and are used to fund the business. It is, however, not necessary that the issued equity must return a dividend for it is based on profits and the terms of business.

Difference between two types of equity instrument-

stock

convertible debentures

Common stock is one of the equity instruments issued by a public company to raise funds from the public . The shareholders have the privilege of being entitled to co-ownership of the company in addition to having the right to vote at the shareholders meeting as per the proportion of shares. they also have rights to take decision in important issues like raising capital to pay dividends and merging business. shareholders can also apply for new shares when the company has increased capital or issues a new allocation to the shareholders.

Convertible debenture is another type of equity instrument which is similar to common bonds, the only difference being that a convertible debenture can be converted into common stock during the particular rates and prices mentioned in the prospectus. Convertible debentures are quite popular for profitable returns from converted stock are higher than those form common bonds. initially they are issued in form of debt later on a fixed date they are converted into equity shares of the company.