Shares and debentures on the stock market are conventional investment terms. Debt and Equity are generally the two main methods through which the company or businesses use to raise money from the market for expansion and growth.
Where a company uses equity to raise finances, the company shares will be issued to the public and those who acquire shares will have the chance to be part of the company as shareholders. On the other hand, if the company decides to raise capital through public debt, debenture is offered to the public and everyone who purchases it is known as a creditor.
What is a Share?
A share is an indivisible unit of capital, expressing the ownership relationship between the company and the shareholder. The denominated value of a share is its face value, and the total of the face value of issued shares represent the capital of a company, which may not reflect the market value of those shares.
Shares attract investors who not only foresee the value or growth of the company but are ready to take a risk. Shares can be issued by a company only if it is a public company, i.e. it Is listed on the national stock exchanges of the country. A company is able to raise money only when there are more buyers in the market for its stock than the sellers.
Types of Shares
- Preference share
Preference shares entitle the owner to receive a fixed amount of dividend every year. This is received ahead of individuals that hold ordinary shares. It is also usually as a percentage of the nominal value (the value stated when the shares were issued).
- Ordinary shares or Ordinary shares
These are shares which carry voting rights on which the rate of dividend is not fixed. They are irredeemable in nature. In the event of winding up of the company equity, shares are repaid after the payment of all the liabilities.
What is a Debenture?
A debenture is essentially a long-term loan that a corporate or government raises from the public for capital requirements. Just like bondholders, debenture holders also earn an interest income for investing in the debt instrument. The coupon rates or interest rates are usually fixed unless when they are of the floating kind. A fixed rate of interest cushions against market fluctuations, making the investment less risky.
All debentures follow a standard structuring process and have common features. First, a trust indenture is drafted, which is an agreement between the issuing corporation and the trust that manages the interest of the investors. Next, the coupon rate is decided, which is the rate of interest that the company will pay the debenture holder or investor. This rate can be either fixed or floating and depends on the company’s credit rating or the bond’s credit rating.
Features of Debenture
- A debenture is a written document issued by the company.
- It is a contract for the repayment of principal and its interest at a specified date and rate.
- A debenture is an acknowledgment of the debt by the company to its holder.
- The rate of interests, term, methods of redemption are all predetermined.
- Interest on debentures is payable normally after six months, whether the company makes a profit or not.
- It is normally secured by a floating charge on the assets of the company.
- It can be issued at par, at a discount or at a premium.
- Debentures cannot be forfeited. The company can only sue the debenture holder for any balance due.
- A debenture is the creditors’ equity, hence it appears on the liabilities side of the balance sheet under the heading ‘long term liabilities’.
- A company can purchase its own shares as an investment.
Types of Debentures
The debenture classification is based on tenure, redemption, mode of redemption, convertibility, security, transferability, type of interest rate, coupon rate, etc. Common types of debentures include:
- Secured Debentures
- Convertible Debentures
- Unsecured Debentures
- Registered Debentures
- Non-convertible Debentures
- Bearer Debentures
Difference Between Shares And Debentures In Tabular Form
| BASIS OF COMPARISON | SHARES | DEBENTURES |
| Description | Shares are the smallest unit of any company’s capital, representing the ownership of the company. | Debentures are the borrowed capital for the company. It represents the debts of the company. |
| Implication | Shareholders are part owners of the company. | Debenture holders are creditors to the company. |
| Types | There are two major types of shares: Equity shares and preference shares. | Types of Debentures include: secured and unsecured, convertible and non-convertible, registered and bear debentures. |
| Returns | A dividend is earned on the shares by the shareholders. | Interest is earned on the debentures by their holders. |
| Payment of Returns | Dividends are paid to the shareholders only when the company has earned profit. | Interest is paid to the debenture holders irrespective of whether the company has earned profit or not. |
| Conversion | Shares are not convertible to debentures. | Debentures can be converted to shares. |
| Risk | Shareholders are the real risk bearers as they do not have any security against their investment. | Debenture holders are not any facing risk as they have a lien over the asset in favor of them. |
| Voting Rights | Equity shareholders have voting rights and the right to participate in the general meetings. | Debenture holders do not carry any voting rights or control in the company. |
| Assets | Assets of the company cannot be mortgaged in lieu of the shareholders. | Assets of the company can be mortgaged in favor of the debenture holders. |
| Issuance | Shares are issued at a discount subject to some legal compliance. | Debentures can be issued at a discount without any legal compliance. |
| Ownership Transfer | Shares are non-divisible and non-transferable. | Debentures are freely transferable. |
| Trust Deed | There is no trust deed for share allocation. | On issuance of debentures to the public, the trust deed must be executed between both parties. |
| Winding Up of Company | In case of dilution of the company, only preference shareholders are given preference and are paid before anyone. | Debenture holders get their money back in case of winding up of the company. |
What You Need To Know About Shares And Debentures
- Debenture implies a long term instrument showing the debt of the company towards the external party.
- A share refers to the share capital of the company. The share of a company provides ownership to the shareholders. It describes the right of the holder to the specified amount of the share capital of the company.
- Shares can never get converted into any form of capital structure, while debentures can get converted into shares or other ownership capital.
- Debenture holders get a fixed rate of interest even if the company has not earned profits. However, shareholders can get dividends only if the company has earned profits. Otherwise, they don’t get it.
- Shares are compulsory for every company to issue, while debentures are not mandatory to be issued by every company.
- Shareholders are the real risk bearers as they do not have any security against their investment, while debenture holders are not facing risk as they have a lien over the asset in favor of them.
- In the case of the company’s winding up, the debenture holders get their entire money back on the preference. However, in the case of shares, only the preference shareholders get a preference of over equity shareholders in terms of payment of the capital amount.
- A trust deed is not executed in case of shares whereas trust deed is executed when the debentures are issued to the public.
- Preferred shares do not offer price appreciation but can be redeemed at an attractive price and offer regular dividends.