Difference Between Shares and Debentures

Capital plays an important role in the formation of a company and a company requires capital at various junctures of its growth. As a company grows and expands in size the requirement for capital increases exponentially. To cater to these needs of funds, companies have various sources to raise capital out of which two prominent sources are – Shares and Debentures. Let’s understand the difference between shares and debentures in detail and how they work:

 

 

What are the Shares of the company?

When a company divides its total valuation of itself into equal parts, then each part of the company is known as a share. In order to raise funds from the public, the company divides its ownership into equal shares and issues these in the primary market for the public to buy.

 

When the company divides its ownership into equal parts, then the value of each share is known as the face value of the share and when the public purchases share in a company, it implies that they are buying ownership in the company and its profits in the proportion of total percentage of shares of the company they have purchased.  

 

 

Types of Shares

 

There are mainly two types of shares:

1). Equity shares

2). Preference shares

The difference between equity shares and preference shares depends on their features and the company’s financial requirements and you need to know about the Type of preference shares    

 

 

What are Debentures in Stock Market?

As we now know that companies sell ownership in their companies by issuing shares in the market similarly issue of debentures is an alternate way of raising capital for businesses without diluting their ownership.

 

Companies issue debentures in the market to the public and in return issue a certificate to them that specifies the maturity period of the debentures at end of which the principal amount will be paid back to the holder and the rate of interest which the debenture holders will get every year till it matures. It is similar to a loan given by the people to the issuer.

 

 

Features of Debentures

1). Debenture holders are the creditors of the company carrying fixed rate of Interest.

2). Debentures are redeemed after a fixed period of time.

3). Debentures may be either secured or unsecured: In secured debentures, when you will buy the debentures, the company will mortgage their assets with you of the same value against the debentures.

Whereas in unsecured debentures, no assets are mortgaged with the debenture holders, and a loan is given to the public on the basis of their reputation.

4). Interest payable on debentures is charged against profit and hence it is a tax-deductible expenditure.

5). A debenture represents that interest is payable even if there is a loss.

 

 

Types of Debentures

There are different types of debentures issued by a company which are based on the needs and requirements of the company. The different types of debentures are:

 

1). Secured and Unsecured debentures

2). Registered and Bearer debentures

3). Convertible and Non-Convertible debentures

4). Redeemable and Irredeemable debentures

5). Specific Coupon Rate debentures

6). Zero Coupon Rate debentures

Know in detail about Different Types Of Debentures And Their Use

 

 

Differences between Shares and Debentures 

Let’s deep-dive in detail to find out the differences between shares and debentures:

 

	Shares	Debentures
Meaning	Shares are the total valuation of the company divided into smaller units of equal value.	Debentures represent a kind of debt units issued by companies to raise funds
Income Source	Equity shareholders earn profits mainly from capital gains or corporate actions such as stock split or bonus issue.	Debenture holders' major source of income is the interest they earn on their investment.
Nature of Issue	The issue of shares comes under owned capital	The issue of debentures is placed under borrowed capital.
Qualification	As shareholders buys ownership of the company in the proportion of their holding, they qualify as owners of the company.	Debenture holders are the creditors of the company as they have a claim over the company in form of debentures.
Market Liquidity	Shares have a high market liquidity as exchange of shares takes place quickly on the stock exchanges.	In comparison to shares debentures are less liquid as they are not traded on exchanges publicly though they can be traded privately.
Risk Involved	Shares are risky as they are traded on the exchanges and their prices fluctuate based on market volatility.	Debentures are less risky than shares as it backed by an agreement and some debentures are even backed by assets so the holders have an assurance or repayment.
Voting Rights	Shareholders possess voting rights in the company with which they participate in the functioning of the company.	Debenture holders do not have voting rights and do not interfere in the affairs of the company.
Conversion	Shares cannot be converted into debentures.	If companies issue convertible debentures, then they can convert into company shares.
Treatment in liquidation	Shareholders are given the last priority when it comes to clearing dues in the event of winding up the business.	In the event of liquidation, the debenture holders are given the first priority when it comes to clearing dues.
Trust Deed	As shares are traded in the market on the exchanges, a trust deed is not required.	The issue of debentures is to the public therefore, a trust deed is mandatory.

 

 

Conclusion

Companies issue shares and debentures based on their needs and requirements. Both these modes of raising funds are different in nature and attract different kinds of investors. Those investing in shares are comparatively high-risk investors and therefore have higher rewards at stake whereas those investing in debentures take a safer option therefore have limited risk.