Question

answer the question in a paragraph of 200 words.

Distinguish stocks from bonds and discuss the advantages and disadvantages of owning each type of financial instrument.

Answer 1

Stocks represent owners capital. They do not carry any fixed interest. The return on the stock is called dividend which depends upon the discretion of the management. So in times of profitability the management may give out dividend. It can even retain the profits for future growth and not give out dividend even in times of profits. The capital invested by the shareholders need not be paid back at the time of liquidation. The main advantage of stock is that it represents ownership rights and hence voting rights in the operations of the business. The main disadvantage is that there is no fixed return. The main disadvantage to the company is that dividends are appropriations of profit and hence they are not tax deductible.

Bonds represent borrowed capital. They carry a fixed interest rate as well as maturity date. The main advantage of investing in bonds is that the investor gets a fixed return at periodic intervals and also receive the par value of the bonds at the time of maturity. The main disadvantage is that the investor is treated as a creditor and does not have voting rights in the business. Also he cannot gain much in terms of trading profits by investing in bonds as compared to stocks which can give huge trading gains.