Shares and debentures are the common terms we often come across as investors or someone with a keen eye on the share market. Before learning the difference between share and debenture, we should know what shares and Debentures mean.
What are shares?
A company’s capital is divided into small equal units called shares. A share is a unit of ownership in a company. If a person owns shares in a company, he/she becomes one of its owners/shareholders in proportion to the number of shares owned. If a shareholder owns more than 50% of the company’s shares, he becomes the biggest owner of the company. If a company uses shares as financial assets, the shareholders are equally entitled to the profits of the company, known as dividends and to the losses also.
There are primarily two types of shares:
- Equity shares: Also known as ordinary shares, these shares are the ones that are traded on the stock exchange. These are the most common types of shares traded.
- Preference Shares: Owners who own preference shares get more preference to the dividend over other equity shareholders and also in case of company liquidation. However, they do not have voting rights like equity shareholders.
What are Debentures?
A debenture is a form of debt instrument, issued by a lender like a bank while allocating capital to a corporation. They are not supported by any collateral so they have to depend on the loyalty of the issuer. They generally have a term validity of more than 10 years. Companies borrow debentures when they need to expand themselves. Debentures help the lender secure loan repayments against the borrower’s assets.
Types of debentures:
1. Registered and bearer Debentures: A registered debenture is registered in the company and can be transferred when a transfer deed is issued.
Bearer debentures do not hold any record in company registers. They can be transferred by mere delivery.
2. Secured and unsecured Debentures: Secured Debentures carry charges on the company’s assets. This allows secured Debenture holders to redeem their principal amount or other unpaid interests from the mortgaged assets of the company. Unsecured debentures provide no such powers.
3. Redeemable and non-redeemable debentures: In the first one, principal money is recovered within a fixed period of time whereas in the second case, it doesn’t happen.
4. Convertible and non-convertible debentures: The first kind can be converted into shares while the second cannot be.
5. First and second debentures: First debentures are recovered before others while second debentures are recovered after that.
Key Differences between Shares and Debentures
Shares and Debentures differ very much in their characteristics and applications. To understand when to use them separately, you need to know the difference between share and debenture.
1. Nature of Capital for the Company
For shares, the capital type is ownership capital which is issued by a company.
For debentures, the capital type is borrowed capital which is issued to yield loans from the market.
2. Return Policy
Shareholders get returns in the form of dividends arising from profits made by the company.
Debenture holders receive returns as interests. The company isn’t required to be in profit in this case. The interest can be of a floating or fixed nature.
3. Nature of Investors
Another important difference between share and debenture is the role of investors in the company’s actions.
All shareholders are partial owners of the company and can decide on who will run the company and other important proceedings. They have voting rights.
Debenture holders are creditors of the company and do not have voting rights on the company.
4. Priority in Case of Liquidation
Shareholders are given the least importance during a liquidation while debenture holders are paid off first.
Shares cannot be converted into Debentures but debentures can be converted into shares.
Though there are some sharp differences between share and debenture, both of them have unique properties and are superior in their own ways of use. Shares provide you opportunities to expand when the company has just started while debentures give you back up when the company is in liquidation. It is up to you to choose the correct option according to the scenario.