What is the difference between Share and Debentures?

By Saurav Yadav

Published on: February 9, 2024 at 13:20 IST

Let’s assume that “A” has established a company named “alphabet”, he is making good profit and the company is running well, now A thinks of increasing the business, but he doesn’t have enough fund, so for the purpose of raising find , he needs investor for his company, and B is interested to share a X number of amount, and wants the profit share of the amount he has invested, therefore from now B is has a share in his company and he will enjoy the loss or the profit of the share he is owing. This example can be said as what Share is called.

Now let’s talk about debentures, a debenture is a type of loan or a debt instrument issued by a company to raise capital. When you buy a debenture, you are essentially lending money to the company, and in return, the company promises to pay you regular interest and return the principal amount at a specified maturity date.

Shares and debentures are both financial instruments, but they represent different forms of ownership and investment in a company. In this article we are going to deal with difference between share and debentures.

Imagine you really like a lemonade stand, and you want to be a part of it. The owner decides to turn the lemonade stand into a big lemonade company and asks people to join in. This is where “shares” come into play.

Buying a Share is Like Owning a Piece of the Stand: When you buy a share, it’s like owning a small part of the lemonade company. If there are 100 shares and you buy 10, you own 10% of the company. You’re now a mini-owner!

Sharing the Lemonade Profits: Sometimes, when the lemonade company makes a lot of money, they decide to share the extra money with the owners (that’s you!). This sharing is called “dividends,” and it’s like getting a bonus because you’re part of the team.

Getting a Say in Lemonade Decisions: Imagine the company needs to decide on new flavors or where to set up more stands. As a shareholder, you might get a say in these decisions. It’s like voting on your favorite lemonade flavor!

Lemonade Stand Value Can Change: Just like the popularity of your favorite lemonade flavor can go up or down, the value of your shares can also change. If the company does well, more people might want to buy shares, and the value goes up. If something goes wrong, the value might go down.

Buying and Selling Lemonade Shares: Shares are like special cards that you can buy or sell with other people who also like the lemonade. These special cards are traded on a market (like a swap meet for lemonade lovers).

A share, in the context of finance and investing, represents ownership in a company. When you own shares of a company, you are a shareholder or a part-owner of that particular business. Shares are also known as stocks or equity. Shares represent a form of ownership and investment in a company, providing shareholders with certain rights and potential financial benefits.

Shares represent ownership stakes in a company. When individuals purchase shares, they become partial owners or shareholders of the company. Shareholders have ownership rights and are entitled to a portion of the company’s profits, typically paid out in the form of dividends. Additionally, shareholders often have voting rights in the company’s decision-making processes, such as electing the board of directors or approving major corporate actions.

One of the key characteristics of shares is their potential for capital appreciation. If the company performs well and its value increases, the price of its shares may rise, allowing shareholders to sell them at a profit. However, shares also come with risks. If the company performs poorly, the value of its shares may decline, resulting in losses for shareholders.

So, in super simple terms, owning shares means you’re a part-owner of a company, and you might get bonuses (dividends), a say in decisions, and even make some money if the company does really well.

Primarily, these are types of shares that a company issues-

  • Equity Shares: Equity shares are like ownership certificates for a company. When you own equity shares, you become a part-owner or shareholder of that company.
  • Trading on Stock Exchange: These shares are bought and sold on a special market called the stock exchange. It’s like a big marketplace where people trade these ownership certificates.
  • Ordinary Shares: Another name for equity shares is “ordinary shares.” These are the most common type of shares that people usually buy and sell.
  • Ownership Benefits: As an equity shareholder, you get certain rights. You can vote on important decisions in the company and might receive a share of the company’s profits as dividends.
  • Preference Shares: Preference shares are a bit special. They give their owners, called shareholders, some extra advantages compared to ordinary equity shareholders.
  • Dividend ‘Preference’: The word “preference” means they get special treatment when it comes to dividends. If the company makes profits, preference shareholders get their share of the profits before the ordinary shareholders.
  • No Voting Rights (Usually): Unlike equity shareholders, preference shareholders might not have the right to vote on decisions. They get the first cut of the profits, but they might not get a say in how the company is run.
  • Safer, Less Risky: Preference shares are often considered a bit safer. Even if the company isn’t doing so well, preference shareholders still get their cut of the profits before others.

Debentures, on the other hand, are debt instruments issued by companies to raise capital. When individuals purchase debentures, they are essentially lending money to the company. In return, the company agrees to pay them back the principal amount along with interest at a specified rate and maturity date.

Debentures are long-term debt instruments issued by a company to raise funds. When an organization needs capital for expansion, projects, or meeting financial obligations, it can issue debentures to interested investors.

Key Features of Debentures:

  • Debt Instrument: Debentures are essentially a form of loan taken by the company from the public. Investors who buy debentures become creditors to the company.
  • Issued under Seal: Companies issue debentures under their corporate seal. This seal represents the company’s formal acknowledgment and commitment to repay the borrowed amount.
  • Long-Term Nature: Debentures have a longer maturity period compared to some other forms of debt instruments. Maturity periods can range from a few years to several decades.
  • Interest Payment: Debenture holders receive periodic interest payments, typically semi-annually or annually, throughout the debenture’s tenure. The interest rate is predetermined at the time of issuance.
  • Secured and Unsecured Debentures: Debentures can be either secured or unsecured. Secured debentures are backed by specific assets of the company, providing security to debenture holders. Unsecured debentures, on the other hand, do not have such backing.

There are five different types of debentures-

Registered and bearer debentures-

  • Registered Debentures: These debentures are registered in the name of the debenture holder with the company. The company maintains a record of registered debenture holders. Transfer of ownership requires proper documentation and updating of company records.
  • Bearer Debentures: Bearer debentures are not registered in the name of a specific individual. Ownership is determined by possession; whoever holds the physical debenture certificate is considered the owner. Transfer of ownership is relatively simple as it involves handing over the physical certificate.
  • Secured Debentures: Secured debentures are backed by specific assets or a charge on the company’s assets. In the event of default, debenture holders have a claim on the specified assets for repayment.
  • Unsecured Debentures: Unsecured debentures, also known as “Naked Debentures” or “Simple Debentures,” lack specific asset backing. In case of default, debenture holders do not have a specific claim on the company’s assets.

Secured and unsecured debentures

  1. Redeemable and non-redeemable debentures
  • Redeemable Debentures: Redeemable debentures have a fixed maturity date, and the company is obligated to repay the principal amount on or before this date. These are typically long-term debts but have a predetermined redemption period.
  • Non-Redeemable Debentures: Non-redeemable debentures, also known as “Irredeemable Debentures” or “Perpetual Debentures,” do not have a fixed maturity date. The company is not required to repay the principal amount during its existence.

First and second debentures

  • First Debentures: First debentures, also known as “First Charge Debentures,” have the first claim on the company’s assets in case of liquidation. In the event of default, first debenture holders are prioritized over others in repayment.
  • Second Debentures: Second debentures, also known as “Second Charge Debentures,” come after the first debentures in terms of asset priority. In case of default, second debenture holders are repaid after the first debenture holders.

Convertible and non-convertible debentures

  • Convertible Debentures: Convertible debentures can be converted into equity shares after a specific period, as per the terms agreed upon. This conversion is usually at a predetermined ratio and provides debenture holders with the opportunity to become shareholders.
  • Non-convertible debentures cannot be converted into equity shares and remain in the form of debt throughout their tenure. Debenture holders do not have the option to exchange them for equity.
Feature Share Debenture
Nature Ownership interest in the company.Debt instrument representing a loan to the company.
Ownership Shareholders are owners of the company.Debenture holders are creditors of the company.
ReturnsDividends are the returns for shareholders.Interest is the returns for debenture holders.
Voting RightsShareholders usually have voting rights.Debenture holders typically do not have voting rights.
RiskShareholders bear the risk of the company’s performance.Debenture holders have a fixed claim on the company’s assets and are less risky compared to shareholders.
ConvertibilityShares are not convertible into other securities.Debentures may be convertible into shares or other securities.
Priority in RepaymentShareholders have the lowest priority in repayment during liquidation.Debenture holders have a higher priority than shareholders in repayment during liquidation.

Conclusion

In conclusion, shares and debentures are two distinct ways companies raise money, Buying shares means owning a piece of the company and sharing its profits (or losses), while debentures are more like lending money to the company and getting fixed payments in return. Shares come with ownership and voting rights, while debentures offer more predictable returns but no ownership stake. Each has its own advantages and risks, appealing to different types of investors based on their preferences and risk tolerance.

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