Difference Between Shareholder and Bondholder (With Table)

Investing is very important for increasing income. We all aware of the fact that money cannot be increased by savings, 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 savings must be invested. But now the question is that 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 by being the shareholder, bondholder, debenture holder, etc.

Shareholder and bondholder both aim at maximizing their investment, both of them often 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.

Shareholder vs Bondholder

The difference between Shareholder and Bondholder is that the while shareholder is the owners, 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 fulfill 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 Between Shareholder and Bondholder

Parameters of ComparisonShareholderBondholder
StatusOwner of the  businessCreditors of the business
IncomeDividend income and capital appreciation.Fix interest income
Voting rightsHave voting rightsNo voting rights
Preference of paymentsPaid dividendsPeriodically interest
PriorityLeast prioritized in paymentMore prioritized for payments

What is Shareholder?

Any person, organization, or company holding stocks of 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 share or stockholders: they own the company’s common share. They have the advantage of having voting rights but cannot interfere in matters that concern the company.
  2. Proffered share or stockholders: they have an advantage of being in priority in profit distribution matters. They do not have any voting rights but do have a voice in concerning matters, 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 a company, governing a company, controlling a company, and many more.

What is Bondholder?

A bondholder typically 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, at any point in time, is forced to sell off its assets, 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, one of which includes the profit that 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 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 board of directors of the company) and capital appreciation of how many shares they hold but bondholders are paid in interest, which is fixed and also premium at the time of repayment.
  3. In case of making any crucial decision of appointment or anything, voting is done, and in this shareholder’s 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.

Conclusion

Therefore, now there should not be any confusion between a shareholder and bondholder. Being investing in any of these is highly personal as the one who is investing money should decide what it wants in return and consider all the factors before making such an investment. And also, before making any investment in a company, a person should check all the records and statements of that particular company carefully as the cases of fraud and misinterpretation are increasing at a higher pace.

There are other options of investment, too, such as investment in provident funds, mutual funds, etc., all of which have their pros and cons.

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
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