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Major Differences Between Shares and Debentures
Major Differences Between Shares and Debentures

February 4, 2020

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Under the current scenario, Debentures and Shares are the most common as well as the most crucial terms among the lucrative options to make an investment. Although both are fundraising sources and are issued to the public, they both are entirely different from each other.
Where one represents the capital of the company, another represents the debt of the company.
Lets us have a closer look at the two terms, their meaning, significance and the key Difference Between Shares and Debentures.

 

Definition of Shares

Shares are the smallest division of the capital of the company which is offered openly for sale in the stock exchange market with an aim to raise capital for the business.
The price at which the shares are offered for sale to the public is known as share price.
Shares signify the part of the shareholder’s ownership in the company. The shareholders receive the dividend from the profit earned by the company.

There Are Two Major Categories of Shares:

  • Equity Shares

Equity shares are the crucial source of long-term capital and carry the voting right. They are irredeemable in nature and do not have a fixed rate of interest.
When the company winds up, equity shares are repaid after making payment of all the liabilities and preference shares.

  • Preference Shares

The preference shares entitle holders with a fixed rate of dividend, however, does not entrust the voting rights to them. Preference shares are redeemable in nature and are repaid before the equity shares in case of company’s wind up.

Definition of Debentures

A debenture is a long-term debt instrument that a company issues under its common seal to the debenture holder reflecting the company’s indebtedness. Debenture holders come under the category of the company’s creditors because the capital raised through them is the borrowed capital of the company. The nature of the debentures can be redeemable or irredeemable, but they can be freely transferred. The income from investment on debentures comes in the form of interest at a certain rate.

There Are Different Types of Debentures, Which Are as Follows:

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

Major Differences Between The Two

  1. The holder of shares is referred to as a shareholder while the holder of debentures is referred to as a debenture holder.
  2. The shares signify the shareholder’s ownership in the company whereas debentures signify the company’s indebtedness.
  3. Share is the company’s capital whereas Debenture is the company’s debt.
  4. The return on shares is the dividend, whereas the return on debentures is the interest.
  5. Unlike debentures, shares are inconvertible.
  6. In the case of winding up, debentures get priority over shares and are repair prior to the repayment of shares.
  7. No security charge is formed for payment of shares. On the other side, a security charge is formed for the payment of debentures.
  8. Shares can be issued at a discount with some legal compliance. Debentures can be issued at a discount in the absence of any legal compliance.
  9. In the case of shares, no trust deed is executed, on the other hand, a trust deed is executed during the issuance of debentures to the public.
  10. Shareholders have the voting right, however, no voting rights are entrusted to the debenture holders.
  11. The dividend can be paid only from the current profit made by the business, not otherwise. The company has to pay the interest on debentures to the debenture holders, whether or not profit is earned by the company.

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

Similarities Between The Two:

  • Both come under the category of Financial Asset.
  • Both can be issued to the public.
  • Both are the major source of raising funds for the company.
  • Both can be issued at the discount.

Conclusion

Every source of raising funds have their own advantages and disadvantages, it depends on the company’s current need for funds, total availability of funds, company’s reputation in the market and so on, that which is the most appropriate source.
Similarly, it depends on investors’ aim & intent behind making an investment that is the best option for him. Like shares comes with voting rights for the shareholders, debentures come with priority in payment during the company’s wind up.


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I\'m Vihaan Sharma who works in SAG Infotech Private Limited and writes on Blog section such as SAG RTA, SAG Infotech, SAGMart for automobiles and technical section and much more.

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