Check out The Differences Between Debentures and Shares!

In the space of trading and the stock market, the words shares and debentures sound similar as they both are closely associated with the investment.

For a business, the two considerable ways, to raise funds for the expansion & development of business, are debt and equity. When the firm opts for the former method i.e. debt, it receives a loan from the public by issuing debenture to them and paying interest regularly to the creditors i.e. the public.

While in the latter case i.e. Equity, a firm or a company opts to issue shares to the public and hence allows them to be part of the firm. Such people who invest in the company’s shares are known as shareholders.

Shares are referred to as the share capital of a company which entitles the shareholder to hold the firm’s share capital in a certain amount.

In a similar fashion, a debenture is also a significant financial tool that represents the business’s debt to the third party or public and reauthorized them to receive a fixed rate of interest from the company.

Currently, many investors tend to make investments in Types of Shares And Debentures to reap future-benefits from them. So, it is very important to comprehend these two securities of investments.

This article sheds light on the meaning of Shares & Debentures And The Differences between the two.

Read Also: Equity Shares: Classification, Benefits & Drawbacks

Meaning of Debentures

A debenture refers to the debt instrument, issued by the company to raise capital or funds and usually unsecured by collateral. As they are not backed by any collateral, they rely on the issuer’s reputation & creditworthiness and secured by his credibility.

The fund so raised is known as borrowed capital and the debenture holders are known as creditors of the business.

The debentures can be transferred freely with a definite rate of interest and are redeemable as well as redeemable. Different Types of Debentures are as follows:

• Secured Debentures
  
• Bearer Debentures
  
• Unsecured Debentures
  
• Convertible Debentures
  
• Non-convertible Debentures
  
• Registered Debentures
  

Debenture holders, unlike the Rights of Preference Shareholders, do not hold any right to participate in the management of the company through voting rights.

Meaning of Shares

A part or a portion of a company's share capital is referred to as shares and are generally sold in the stock market to raise the company’s capital or fund.

The total capital of a company is divided into small fractions and sold out to the investors at a certain price known as share price and entitle the shareholder to a proportion of the profits known as dividends.

The shares are easily transferable and are widely classified into two:

• Equity share
  
• Preference share
  

Distinguish Between Shares and Debentures

Capital

Shares are company-owned capital whereas debentures are borrowed capital on which interest is paid to the debenture holders.

Holder

An individual who holds the shares or the ownership of the shares is known as a shareholder.

An individual who holds the debentures or the ownership of the debentures is known as a debenture holder.

Status of The Holder

Shareholders are the owners of the company as they hold a certain part of ownership in the company based on the proportion of the total shares he or she holds.

The shares signify the ownership of the shareholders in the firm.

The debenture holders are the creditors of the company as they simply lend their money on which they receive a fixed interest every month.

Debentures signify the indebtedness of the company.

Profit on Investment/ Return

Shareholders get a portion of the total profit earned by the company, known as a dividend, based on the portion of his/her ownership.

Debenture holders get a fixed amount of interest on the money borrowed from them.

Payment of Return And Its Security

Shareholders get dividends out of the profit yielded by the company. Debenture holders inevitably receive interest, whether or not a company has earned profit.

And so there is a security of return in case of debentures which is absent in case of shares.

Voting Rights

Shareholders have voting rights through which he/she can take active participation in the company’s management.

Debenture holders do not get any voting rights and thus he/she can not participate in the company’s management.

Conversion

Shares with no means can be converted into debentures whereas vice versa is possible i.e. debentures can be easily converted into shares.

Trust Deed

In the case of shares, a trust deed is not executed, whereas, a trust deed is carried out when the debentures are released to the public.

Read Also: All You Need to Know About Debentures, Its Types, Advantages and Disadvantages

Wrapping up:

The business world has its own array of capital format which is highly complicated and includes debt fund, share capital, angel capital, surplus reserves, etc. Each element of capital format has its own features that make it relevant under different circumstances and situations.

Shares and Debentures are the two most common components of capital structure, however, they are extremely different from each other. The most fundamental Difference Between Preference Shares And Debentures the two is that Shares refer to the company’s capital which is owned by the shareholders and entrust the right to vote in the company’s issues as well as the right to claim their proportion in the company’s profits.

Whereas, debentures refer to the debt instruments which are secured in nature and issued by the company to raise funds. Debentures have a fixed rate of interest with cumulative & non-cumulative peculiarities and redeemable after a certain time-frame either in a lump or instalment.