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As more and more people invest their money in shares and debentures nowadays, it has become important for everyone to understand its meaning. Investing in these two things helps people get better returns. However, shares and debentures are two very different things. They can be differentiated based on various things such as ownership, return, repayment, conversion, quantum, security, and others. Shares are the company’s share capital, whereas debentures are debt instruments that can be medium to long-term. Big companies make use of them for borrowing money. Let us now find out the difference between shares and debentures.
What are Shares?
Shares are the smallest division of the capital of the company. They are put for sale in the open market or specific persons for raising capital for the company. The share price is the price at which the shares are made available.
It is known for representing the portion of the shareholder’s ownership in the company. Thus, it makes the shareholder entitled to the dividend, if there is any, which the company declares from the profits. Shares comprise a unique number and can be transferred.
There are two major types of shares:
- Equity Shares
- Preference Shares
Equity shares are irredeemable and have voting rights on which the dividend rate is not fixed. Moreover, in the case of winding up of the company, these shares get repaid only after all the liabilities are paid off. On the other hand, preference shares are redeemable and do not have voting rights in general other than in special cases, but the dividend rate is fixed. In the case of winding up of the company here, these shares get repaid before equity shares.
What are Debentures?
Debentures are long-term debt instruments that the company issues under its common seal. It is issued to the debenture holder and displays the company’s indebtedness. Thus, the capital that the company raises is the borrowed capital.
As a result, the debenture holder becomes a creditor of the issuing company. Further, they can be transferred freely. They can also be redeemable or irredeemable in nature. There are no voting rights in debentures. The major types of debentures are:
- Unsecured and Secured Debentures
- Non-Convertible and Convertible Debentures
- Registered and Bearer Debentures
- Irredeemable and Redeemable Debentures
Difference Between Shares and Debentures
As discussed above, there are many differences between shares and debentures. They are on the basis of many factors such as ownership, trust deed, payment of return, voting rights, repayment, etc. Let’s take a look at what they are:
Basis | Shares | Debentures |
Definition | They are the company’s owned funds | They are the company’s borrowed funds |
Representation | They represent the company’s capital | They represent the company’s debt |
Holder Name | They are called shareholders | They are called debenture holders |
Form of Return | Dividend is given to the share holder | Interest is given to the debenture holder |
Ownership | The status of holders is owner | The status of holders is creditor |
Receiving Profits | Shareholders get paid dividend only where there is profit | Debenture holders get paid interest regardless of profit or loss |
Trust Deed | There is no execution of trust deed | Execution is mandatory |
Repayment in case of Winding Up | They get repaid after all the liabilities are paid off | They are prioritised over shares, thus they get repaid before them |
Voting Rights | Shareholders have voting rights | Such holders do not have any voting rights |
Quantum | Dividend is an appropriation of profit | Interest is a charge against profit |
Security for Payment | Absent | Present |
Conversion | They cannot be converted to debentures | They can be converted to shares |
Allowable Deduction | Dividend is not allowed as deduction | Interest is allowed as deduction |
Conclusion
When we talk about the comparison of debentures and shares, we see that both of them come with their own strengths and weaknesses. While shareholders get ownership and voting rights, the bonds get paid preferentially when liquidation of the company takes place. Thus, people consider shares to be riskier than debentures. However, the returns to investors are higher with shares. All in all, both of them are used by companies for raising money from the market. Thus, it is important for investors to focus on their personality, investment objectives, risk tolerance, and stock market trading app conditions when making investment decisions such as choosing between shares and debentures.
