difference between share and debenture
Whenever it comes to investing, the first thought that comes to mind is shares or equities. Shares give companies the option to raise money, and on the other hand, allow investors to invest in companies by buying shares. But do you know that companies can also raise capital by issuing debentures, and investors can also buy these debentures and earn from the investment? Although both shares and debentures do more or less the same purpose, there are lots to learn from the difference between share and debenture
Shares are the division of the ownership of the company into smaller units. Companies issue shares to raise capital from the investors. The investors in turn get an ownership right and interest in the company as well as earn dividends when the company earns profits from its business. Debentures, on the other hand, are debt instruments, offered to borrow money from the investors. Although debentures are also used to raise capital, their characteristic features are entirely different from shares. In this article, we will learn the difference between share and debenture in detail and try to understand how both financial instruments work.
There are several differences between shares and debentures to learn
Meaning: Shares and Debentures
Shares are one of the most preferred ways of raising capital by companies. Companies issue shares to raise capital that can be used for several reasons, allowing companies to grow in the future. Whenever you buy a share, you become an investor or shareholder of the company. You get an ownership right by which you can become eligible to participate and vote in the company’s major decision-making policies, selection of board members, etc. Besides, you also become eligible to receive dividends when the company earns profits. You can sell the shares and earn capital gains from the same.
Debentures are also used by companies to raise funds from investors. However, unlike shares, debentures are debt instruments, which means that the company is borrowing money from investors. The investors, on the other hand, become lenders and earn a fixed percentage of interest from the money lent to the company. This is also the main difference between share and debenture. To know more about the difference between share and debenture, you can click on the following link https://www.tickertape.in/blog/difference-between-shares-and-debentures/
Types of Shares
There are two types of shares issued by the company- Equity shares and Preferential Shares.
Equity Shares: Equity shares are the type of shares that allow shareholders to exercise voting rights in the company. An equity shareholder can participate and vote in the company’s important decisions such as selection of board members, policy-making, etc. The equity shareholder also gets eligible to receive dividends when the company makes profits.
Investing in shares allow you to earn capital gains
Preferential Shares: Preferential shares offer shareholders preferential rights on the dividends of the company. Unlike equity shareholders whose dividend is not fixed, preferential shareholders enjoy fixed dividend payments from the company. The dividend is also cumulative. They also enjoy priority payment of dividends over the equity shareholders. However, the preferential shareholders do not enjoy any voting rights in the company.
Types of Debentures
There are a total of six different types of debentures categorized under three heads- secured and unsecured debentures, redeemable and non-redeemable debentures, and convertible and non-convertible debentures.
Secured Debentures and Unsecured Debentures
Secured debentures carry the right of preference overpayment of the principal amount in case the company declares insolvency or bankruptcy. Whenever a company declares bankruptcy its assets are sold and the proceeds from the same are used to pay the principal investment amount to the shareholders. The secured debenture holders enjoy priority of principal payment over unsecured debenture holders in such a case.
Redeemable Debentures and Non-redeemable Debentures
Redeemable debentures can be redeemed within a preset period, i.e; the redeemable debenture holders can redeem the debenture and get back the principal amount. Non-redeemable debenture holders, on the other hand, cannot redeem the debentures while the company is in operation. However, the non-redeemable debenture holders can redeem the debentures when the company is liquidated.
Convertible Debentures and Non-convertible Debentures
Convertible debentures have the features to be converted into ordinary equity shares of the company within a predetermined period. Similarly, non-convertible debentures cannot be converted to shares by any means.
Return on Investment
The other major difference between share and debenture is in terms of returns. The returns that can be earned from investing in shares are not fixed and depend on the performance of the share on the stock market. If the share’s price increases, the shareholder will earn capital gains, whereas, if the share price decreases, the investor has to suffer losses. Therefore, investment in shares is subjected to market risks. The other way of earning from shares investment is through dividends. When the company earns a profit, it announces dividends to its shareholders.
On the other hand, debenture holders earn a fixed interest on their investments. This is similar to the interest earned by banks and other lending institutions that offer loans to borrowers. However, unlike shareholders, debenture holders do not enjoy dividends from the company in which they invest.
As discussed, shares are of two types- equity shares and preferential shares. The equity shareholders have voting rights in the company’s decisions such as the election of board members, policy-making, etc.
Debenture holders do not enjoy any voting rights in the company.
Risk Associated with Investment
Shareholders bear the risk associated with equity investment. If the company declares insolvency, both the two types of shareholders (equity and preferential) receive payment from the proceeds but the preferential shareholders are given preference over the equity shareholders.
Debenture holders enjoy first right over the proceeds made from selling the company’s assets in case of bankruptcy or insolvency.
Shares cannot be converted into debentures. However, there is a class of debentures called convertible debentures that can be converted into shares within a set time frame. This is also a key difference between share and debenture.
To sum up the difference between share and debenture, both shares and debentures are ways to raise capital for the companies and at the same time allowing investors to earn from their investments. However, the difference between share and debenture is many. It is also important to learn the key difference between share and debenture and it allows investors to choose the right investment instrument to put their money into.