Nowadays, investment in shares and debentures has taken a dominant position in the society, as people of different ages, religion, sex, and race invest their hard earned money, with an aim of getting better returns. While Shares refers to the share capital of the company. It describes the right of the holder to the specified amount of the share capital of the company.
Conversely, debenture implies a long term instrument showing the debt of the company towards the external party. It yields a definite rate of interest, issued by the company, may or may not be secured against assets, i.e. stock.
So, if you are going to invest in any of the two securities, you should first understand their meaning. In this article, we have provided the difference between shares and debentures in tabular form.
Content: Shares Vs Debentures
|Basis for Comparison||Shares||Debentures|
|Meaning||The shares are the owned funds of the company.||The debentures are the borrowed funds of the company.|
|What is it?||Shares represent the capital of the company.||Debentures represent the debt of the company.|
|Holder||The holder of shares is known as shareholder.||The holder of debentures is known as debenture holder.|
|Status of Holders||Owners||Creditors|
|Form of Return||Shareholders get the dividend.||Debenture holders get the interest.|
|Payment of return||Dividend can be paid to shareholders only out of profits.||Interest can be paid to debenture holders even if there is no profit.|
|Allowable deduction||Dividend is an appropriation of profit and so it is not allowed as deduction.||Interest is a business expense and so it is allowed as deduction from profit.|
|Security for payment||No||Yes|
|Voting Rights||The holders of shares have voting rights.||The holders of debentures do not have any voting rights.|
|Conversion||Shares can never be converted into debentures.||Debentures can be converted into shares.|
|Repayment in the event of winding up||Shares are repaid after the payment of all the liabilities.||Debentures get priority over shares, and so they are repaid before shares.|
|Quantum||Dividend on shares is an appropriation of profit.||Interest on debentures is a charge against profit.|
|Trust Deed||No trust deed is executed in case of shares.||When the debentures are issued to the public, trust deed must be executed.|
Definition of Shares
Smallest division of the company’s capital is known as shares. The shares are offered for sale in the open market, i.e. stock market to raise capital for the company. The rate on which the shares are offered is known as share price. It represents the portion of ownership of the shareholder in the company. The shareholders are entitled to the dividend (if any) declared by the company on the shares.
The shares are movable i.e. transferable and consist of a distinctive number. The shares are broadly divided into two major categories:
- Equity Shares: The shares which carry voting rights on which the rate of dividend is not fixed. They are irredeemable in nature. In the event of winding up of the company equity, shares are repaid after the payment of all the liabilities.
- Preference Shares The shares which do not carry voting rights, but the rate of dividend is fixed. They are redeemable in nature. In the event of winding up of the company, preference shares are repaid before equity shares.
Definition of Debentures
A long-term debt instrument issued by the company under its common seal, to the debenture holder showing the indebtedness of the company. The capital raised by the company is the borrowed capital; that is why the debenture holders are the creditors of the company. The debentures can be redeemable or irredeemable in nature. They are freely transferable. The return on debentures is in the form of interest at a fixed rate.
Debentures are secured by a charge on assets, although unsecured debentures can also be issued. They do not carry voting rights. The debentures are of following types:
- Secured Debentures
- Unsecured Debentures
- Convertible Debentures
- Non-convertible Debentures
- Registered Debentures
- Bearer Debentures
Key Differences Between Shares and Debentures
The following are the major differences between Shares and Debentures:
- The holder of shares is known as a shareholder while the holder of debentures is known as debenture holder.
- Share is the capital of the company, but Debenture is the debt of the company.
- The shares represent ownership of the shareholders in the company. On the other hand, debentures represent indebtedness of the company.
- The income earned on shares is the dividend, but the income earned on debentures is interest.
- The payment of dividend can be made only out of current profits of the business and not otherwise. Unlike the interest on debentures which has to be paid by the company to debenture holders, no matter company has earned profit or not.
- Dividend is not a business expense and so is not allowed as deduction. On the contrary, interest on debentures is a expense and so allowed as a deduction.
- In the event of winding up, debentures get priority of repayment over shares.
- Shares cannot be converted as opposed to debentures are convertible.
- There is no security charge created for payment of shares. Conversely, security charge is created for the payment of debentures.
- A trust deed is not executed in case of shares whereas trust deed is executed when the debentures are issued to the public.
- Unlike debenture holders, shareholders have voting rights.
- Shares are issued at a discount subject to some legal compliance. Debentures can be issued at a discount without any legal compliance.
- Both are Financial Asset.
- Both can be issued to the public.
- Source of raising money for the company.
- They can be issued at the discount.
As everything has two aspects, shares and debentures also have its merits and demerits. While shares are give voting rights to the shareholders, debentures get priority in payment, at the time of winding up of the company.