Shareholder vs Bondholder: Difference and Comparison

Investing is very important for increasing income. We are all aware of the fact that savings cannot increase money, the amount remains as it is, but by investing the same money, we can get higher returns in return.

Therefore, at least a part of the savings must be invested. But now the question is where should we invest it. The most reliable option is investing in a company where you can get higher returns.

You can invest in a company by several means, such as being the shareholder, bondholder, debenture holder, etc.

Shareholders and bondholders both aim at maximizing their investment, both of them confused as one, but they are very different on several terms. In this article, all the possible differences have been mentioned to make it clearer.

Key Takeaways

1. Shareholders own equity in a company, whereas bondholders lend money to the company through debt.
2. Shareholders have voting rights and receive dividends, while bondholders receive interest payments and have priority in the event of liquidation.
3. Shareholders have a higher potential for returns and risk, while bondholders have a lower risk and a fixed return.

Shareholder vs Bondholder

The difference between shareholders and bondholders is that while a shareholder is an owner, bondholders are just creditors of the company to whom the company has to repay a certain amount. They also differ in terms of voting rights, priority at times of bankruptcy, payment preferences, and many more. In general, shareholders have more rights than bondholders, but along with that, they are also exposed to many other risks.

Shareholders are the owners of a company who owns some or all shares of that company. They have several responsibilities to fulfil towards the company and also have some rights, such as voting rights.

They have paid in dividends mostly, and at the time of bankruptcy, they are paid at the end after making payment to all other creditors.

Bondholder is those who own the bonds and are creditors of the company. They are paid a fixed amount of interest periodically. They do not have any special rights except they can check the company’s financial statements like shareholders but are paid earlier than them in case of bankruptcy.

Comparison Table

Parameters of Comparison	Shareholder	Bondholder
Status	Owner of the  business	Creditors of the business
Income	Dividend income and capital appreciation.	Fix interest income
Voting rights	Have voting rights	No voting rights
Preference of payments	Paid dividends	Periodically interest
Priority	Least prioritized in payment	More prioritized for payments

What is Shareholder?

Any person, organization, or company holding stocks in a company is considered a shareholder.

They are also called stakeholders and have the following responsibilities:

• They have to decide whom they want to give power to and assign the duties. This also includes appointing and removing them.
• They have to decide the salary of directors while considering the expenses also.
• They have to make the necessary changes in the company’s constitution.
• They have to regularly check and approve the company’s financial statements.

Types of shareholders;

1. Common shares or stockholders: they own the company’s common shares. They have the advantage of having voting rights but cannot interfere in matters that concern the company.
2. Proffered share or stockholders: they have the advantage of being in priority in profit distribution matters. They do not have any voting rights but do have a voice in concerning matters and also have fixed dividend rates.

Rights of shareholders:

• Controlling the company’s key executive decisions.
• Receiving dividends.
• Can look through records and financial statements.
• Annual meetings
• Right and power of suing any company in case of fraud or misleading.
• Right to vote (proxy can be placed in case he cannot attend the meeting)

Shareholders are very important for any company as they have several importances such as company operations, financing, governing, controlling, and many more.

What is Bondholder?

A bondholder refers to an investor who owns bonds that are issued by any entity or borrower, such as a company or government. They are known as the creditors of that particular company they own bonds of. Bondholders are not the owners. They are more of a lender.

Bondholders have the authority to buy or sell the bonds in the bond market. If a company crashes down or is forced to sell off its assets at any point in time, then the bondholders are placed in the frontline for the repayment.

This is a superior advantage that the bondholders are given that provides seniority in the field of security. Therefore, bonds are recognized as much safer investments than stocks.

When the bonds of an individual bondholder get mature, that holder gets back the initial principal amount along with the usual periodic interest amount.

There are many such advantages of holding a bond, including the profit the bondholders achieve if their bond’s value increases in the market.

One of the most important specifications one must know before investing in bonds is that the bondholders are deprived of their voting rights. The bondholders can also buy previously issued bonds via any broker or institution from the secondary market.

Main Differences Between Shareholder and Bondholder

1. Both shareholder and bondholder have a different status in the business or company as the Shareholder is the owner, who owns the company, while the bondholder is merely a creditor who does not own the company.
2. When it comes to income, both of them are paid differently and are also preferred differently. While shareholders are paid in dividends (i.e., declared by the company’s board of directors) and capital appreciation of how many shares they hold but bondholders are paid in interest, which is fixed and also a premium at the time of repayment.
3. In case of making any crucial decision of appointment or anything, voting is done, and in this, shareholders’ own right to vote, unless they specifically belong to a non-voting category, whereas no bondholders have any right to vote.
4. At the time of bankruptcy, when a company is unable to repay its debt, shareholders are given the last or second priority while making payments, while bondholders are given the priority above shareholders in making the payments.
5. There are other risks evolved with being a shareholder of a company, such as exposed to agency problems, while there is no such risk involved if you are a bondholder of the same company.

References

1. https://heinonline.org/hol-cgi-bin/get_pdf.cgi?handle=hein.journals/hlr118&section=38
2. https://onlinelibrary.wiley.com/doi/abs/10.1002/1097-0266(200101)22:2%3C125::AID-SMJ150%3E3.0.CO;2-H
3. https://heinonline.org/hol-cgi-bin/get_pdf.cgi?handle=hein.journals/jcorl13&section=16
4. https://www.jstor.org/stable/40686709

Last Updated : 14 July, 2023