Definition of Shares and Debentures

Introduction

Shares and debentures are two of the most common types of securities. They are both important tools for businesses, but they serve different purposes. In this article, we will discuss the definition of shares and debentures, as well as their key differences. We will also explore the different kinds of both that are available to businesses. By understanding these concepts, you can make more informed decisions about your financial security!

Shares and Debenture: Meaning

Shares and debentures meaning: These are two of the most common types of securities. Security is a financial instrument that represents an ownership stake in a company or enterprise. There are many different types of securities, but shares and debentures are two of the most important ones.

Shares represent ownership in a company. When you own shares, you are entitled to a portion of the profit of the company based on the number of shares you own. When a company makes money, it can distribute some or all of its profits to shareholders in the form of dividends.

Dividends are cash payments made by a company to its shareholders. The amount paid out as a dividend is usually determined by the board and is approved at an annual general meeting.

Debentures are a type of debt security. When you own debentures, you are lending money to the company in exchange for a fixed rate of interest and the promise of repayment at a specific date in the future.

Shares and Debentures:  Difference

Shares and debentures have the following difference:

1. The key difference between shares and debentures is that shareholders are owners of the company, while debenture holders are the creditors of the company.
2. Shares and debentures are two ways a company can raise money for its business operations. Shareholders have ownership rights in the business, whereas debenture holders do not have any ownership right but they receive a fixed rate of interest on their investment until maturity. 
3. Shares are equity instruments, which indicate ownership in a company and entitle its holder to dividends based on profits earned by the business. Debentures are debt instruments in the form of a certificate issued by the company to raise money. 

Kinds of Shares and Debentures

Let’s get into the kinds of shares and debentures in detail!

SHARES

There are two types of shares; common shares and preferred shares. Ordinary shareholders or common shareholders are those who have ordinary voting rights and share in the profits of the company as they are earned. Preferred shareholders, on the other hand, have preferential rights over dividends and also in the repayment of their investment amount in case of winding up of the company.

What are Common Shares?

Common shares are the most common type of share and usually represent the majority of a company’s equity. They give holders the right to vote on major issues, such as who should be appointed to the board of directors or whether to liquidate the company.

What are Preferred Shares?

Preferred shares offer investors preferential treatment over common shareholders in terms of dividend payments and the liquidation of the company. For example, a preferred shareholder may be entitled to receive their dividend payments before common shareholders, or they may be first in line to receive a payment if the company is sold.

Debentures

Debentures can be classified into two categories; secured debentures and unsecured debentures. Secured debentures are those that are backed by a fixed and specific asset of the company, while unsecured debentures are not backed by any assets.

What are Secured Debentures?

Secured debentures are debentures that are secured by a mortgage or charge.

They rank next to preference shares in order of priority when it comes to the distribution of a company’s assets during liquidation, and are sometimes referred to as “first-ranking ordinary debentures”.

Secured debenture holders may be entitled to interest payments from both the company and the mortgagee or charge holder, as well as a share of the proceeds from the sale of the charged property.

What are Unsecured Debentures?

Unsecured debentures are not backed by collateral.

Unsecured debt is also referred to as debenture. The lender’s only source of repayment comes from the general creditworthiness and reputation of the borrower, which makes unsecured debt riskier for investors than secured debt. In addition, unsecured debt may be subordinated to other creditors; that is, in the event of bankruptcy or liquidation, they may be paid back only after other more senior creditors have been repaid.

However, there exists yet a few more types of debt:

Senior debt, also called senior secured debt, is the most secure form of corporate debt because it’s backed by collateral and paid off before other creditors in the event of bankruptcy or liquidation. 

Subordinated debentures are debt securities that rank lower in priority than other outstanding debt obligations of the issuer. In the event of bankruptcy or liquidation, subordinated debenture holders would be repaid after all other creditors have been paid in full.

Mezzanine debt is a type of unsecured debt that ranks higher than subordinated debt but lower than senior unsecured notes. It is often used to finance the expansion of a company or provide liquidity to its owners.

Conclusion

Although this is not an exhaustive list of all things related to these two investments but should serve as a good starting point if one is interested in learning more about them.