Preference shares or preferred stocks and debenture are the most popular financial instrument among investors which offer better returns as compared to other instruments and have other features as well. But before making any decision one should have a clear understanding regarding the difference between Preference shares and debentures.
Though both prefered shares and debentures provide a fixed rate of returns to the investor, some key differences are there which are very significant to be aware of any investor.
Hence we will conduct a detailed comparison between preference share and debenture further in this article. In fact, Preference shares and debentures are the sources of working capital finance which are floated in the financial market to fulfil the medium to long term requirements of funds.
Preference Shares vs Debentures (Comparative Table):
| Basis of Comparision | Preference Share | Debenture |
|---|---|---|
| Types of Funds | Equity Based Funds | Debt Funds |
| Company has to | Dilute Ownership | Require Collateral |
| Facilitates | Long-term requirement of funds | short to medium term |
| Ownership | Partial Owners | Creditors |
| Returns | Dividend | Interest |
| Security | Unsecured | Secured |
| Maturity Period | Uncertain | Fixed |
| Capital Gain | Yes | NO |
| Addition Returns | Possible | NO |
| Convertibility | cannot converted to debentures | can be converted to shares |
| Liquidity | No | Prefered over preference shares |
Difference between Preference Shares and Debentures:
Although there are also some similarities between preference shares and debentures yet, for the time being, to understand the head to head differences between both preference shares and debentures, we should consider the advantages and disadvantages in terms of various key features.
Moreover, there are different types of preference shares and debentures available which provide special features to meet the investor’s interest and to minimize the inherent risks.
For more details follow the links below.
- Preference shares are equity-based capital whereas debentures are debt funds.
- For issuing preference shares, the companies have to dilute their some proportion of ownership whereas to issue debentures any collateral is required.
- Preference shares are the source of long term financial requirements whereas debentures are the sources of short to medium term finance.
- Preference shareholders are the partial owners of the company whereas debenture holders are creditors of the company.
- Returns on preference shares are paid in terms of dividend, on the other hand, in case of debentures it is paid in the form of interest.
- Preference shares are unsecured or not backed up by any collateral whereas debentures are issued by creating a charge on the company’s assets, hence secured.
- Debenture holders earn a fixed interest rate until their capital amount are invested in the company (till maturity period), on the other hand, Preference shareholders earn a fixed rate of dividend till the company’s existence.
- Preference shareholders entitled to participate in surplus profits of the company if they hold Participating preference shares whereas debenture holders don’t hold such rights.
- Preference shareholders have an opportunity to make capital gain due to the price movement of share, in the long run, debenture holders, on the other hand, don’t have such an opportunity.
- Preference shares can’t be converted to debentures whereas debenture can be converted to equity shares.
- Preference shares are may or may not be redeemed (non-redeemable) till bankruptcy or winding up of the company whereas debenture has to be redeemed after a stipulated period of time.
- If the company has gone bankrupt or shut down its operation, then at the time of recovery of capital amount debenture holders are given priority over preference shareholders.
Bottom Line:
Although both preference shares and debenture provide a fixed rate of return yet preference share offer more flexibility to earn other than the dividend. However, debentures offer a fixed rate of interest with more security as compared to preference shares.
In a nutshell, both preference shares and debentures have their own advantages as well as disadvantages and offer various features as well according to need and types of investors who are willing to invest.
See Also,
Difference between Bonds and Debentures
Difference between Shares and Debentures
Difference between Equity shares and Preference shares
source Investopedia
