Difference Between Shares and Debentures (With Table)

Shares and Debentures are two of the most common methods of raising capital funds by a new venturing company or a company looking for an expansion or upgrade. Selling out shares and debentures in the marketplace is one of the surest ways to attaining a large sum of money. Hence as an investor, the question of buying shares or debentures is bound to pop up.

Shares vs Debentures

The difference between shares and debentures lies in its rights. Shares are owned by the company it is sold by. Shares are issued by corporate entities where they sell a portion of their proprietorship to raise funds. The investor holding share’s own a part of the company’s capital. On the other hand, debentures are borrowed instruments used to raise funds to settle a long term debt. The debenture holder has no right over the company’s capital as assets are burrowed.

Shares are small, finite divisions of the company’s capital. Purchasing a share gives its owner (called shareholder) rights to the company’s capital in proportion to shares owned. In return, the investor is paid by dividends of profit earned by the company.

Debentures are long term debt instruments issued by the company to raise capital under its seal. The investor does not own any capital rights to the company but the company is indebted to the investor (called debenture holder). In return, the debenture holder is paid interest on the loaned amount periodically.

Comparison Table Between Share and Debenture

Parameters of ComparisonShareDebenture
MeaningSmall units of the company’s capital , issued to public giving them ownership rightsLong term debt instruments issued by the corporate entity to raise funds for loans from the market
OwnershipOwned capitalBorrowed capital
Holder NameShare holderDebenture holder
Holder rightsThe owner owns rights to the company’s capital and also voting rights in case ofThe owner has no such rights.
ConversionShares cannot be converted to debenturesDebentures can be converted into shares.
ReturnsPaid in form of dividends of profitPaid in form of loan interest.
RiskRisky as it fluctuates with performance and profitsRisky, however, returns are secured.
In case of loss/liquidationNo returnsIn case of liquidation of company debenture holders is the first to be repaid.

What is a Share?

A share or equity or capital stock is the smallest unit of a company’s capital. The capital of a company is divided into small, finite divisions that are sold to the public to raise funds. Owning a certain percentage of a company’s share gives the shareholder ownership of the said percentage of the company.

for eg is a person purchase 10 shares out of 100 of a company, he /she owns 10% of the company. Similarly, if a person owns more than 50 % of capital shares he is said to be the major shareholder of the company while the others are minors.

As the owner of the company’s capital, the shareholder has entitled to voting and ownership rights. The owner is paid dividends of profits of the company. The shares can also be traded in stock markets for value. Shareholding can be risky as it fluctuates with the profits and  in case of liquidation of the company the shareholder is not returned his share in the capital however it offers high returns to investors.

Shares can be of two types:

  1. Equity Shares: These are also called common/ ordinary shares. These shares can be traded on the stock exchange.
  2. Preference Shares: These are shares that have preference over normals share as in case of liquidation of the company these shareholders are the first to be considered.

What is a Debenture?

Debentures are debt tools issued by the corporate entity to raise funds as loans from the public. In simple words, the company is indebted to you. The owner of a debenture is called a debenture holder. Usually a debenture has a lower interest rate than a bank loan or overdrafts. The interest rate in itself may be fixed or floating.

The company is entitled to pay returns to you in form of loan interest, payable over a long period. Debentures are convertible into shares. However, a debenture holder possesses no rights as the capital is not owned but burrowed.

Comparatively debenture investors face lower risk has even in the case of liquidation of the company, repayment is assured.

Debentures are of following types:

  1. Perpetual Debentures: As the name suggest these are lifelong tools that do not mature. They are treated much like equities and serve as a lifelong source of income for the debenture holder.
  2. Redeemable Debentures : These debentures are fixed for a certain period of time and on the expiry of this term , the principal amount is repaid.
  3. Convertible Debentures: These are long term debt tools issued by the company that can be converted in shares/equities after a certain period of time.

Main Differences Between Shares and Debentures

  1. Shares are owned capital while debentures are burrowed.
  2. Shareholders have rights over the companies capital while debenture holders do not.
  3. Returns are paid in the form is profit dividends to shareholders while debenture holders are repaid interest of the burrowed amount
  4. Shares are rigid and non-convertible while debentures are more flexible.
  5. Investors face high risk in shareholding as returns depend on fluctuations in market and performance and also face the risk of liquidation however debenture holders have the first claim over the company’s asset in case of liquidation.

Conclusion

Although both shares and debentures are used to raise capital funds from a market by any entity both differ in their nature and return. Owned capitals give ownership rights with high risks and high returns while burrowed capital give low returns but assured repayment. Investors must choose wisely and may include both to reduce risk and improve exposure.

References

  1. https://journals.sagepub.com/doi/pdf/10.1177/00197939860390
  2. https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1540-6261.1966.tb02953.x
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