There has been always a misconception between Shares (Equity shares) and Debentures when it comes to investment form the investors’ point of view. There are some pros and cons of both shares and debentures simultaneously.
On the other hand, if we consider the issuer’s (company) perspective equity shares are the permanent capital and debentures are liabilities (debt) of the company. In this article, we will discuss the difference between shares and debentures in details.
Table of Contents
Shares vs Debentures (Comparision Table):
The following table will help you to understand the difference between shares and debentures quickly.
| Basis of Comparision | Shares | Debentures |
|---|---|---|
| Meaning | Equity shares are permanent capital of the company. | Debenture being a debt instrument is the debt on the company. |
| Types | Ordinary/ Common shares Preference/ prefered Shares | Secured and unsecured debentures Convertible debentures Redeemable and Non-redeemable debentures Registered and Bearer debentures Callable and Putable debentures Fixed and floating interest rate debentures |
| Rate of Returns | Dividend not fixed | Fixed Interest Rate |
| Voting Rights | Yes | NO |
| Ownership | Hold Ownership | Creditor of the Company (Not Owner) |
| Redeemability (Maturity Period) | Can never be redeemable | Can be redeemable after stipulated period. |
| Security | Unsecured | Secured |
| Convertibility | Cannot be converted to debentures | Can be converted to shares |
| What if the company wind up? | Repaid after clearing other debt | Prefered over equity shares and preference shares |
Difference between Shares and Debentures:
To understand the difference between share and debentures we need to compare both on the basis of different aspects as follows.
1) Definition:
Equity shares or Shares refers to some proportion of ownership which the shareholders hold in the company. The companies dilute their ownership in the form of shares to raise funds from the public and investors purchase those shares to make a return on their investment.
On the other hand, debentures are the debt instrument which a company issues to raise funds from the general public. Debentures are the debt on the company which have to be repaid after a stipulated period of time.
2) Types:
Typically, majorly two types of share are issued.
- Ordinary Equity Shares (Common shares/stocks)
- Preference shares/ prefered stocks
See Also, Difference between equity share and preference share
5 Major Types of Preference shares
On the other hand, debentures can be classified as follows.
- Secured and unsecured debentures
- Convertible debentures
- Redeemable and Non-redeemable debentures
- Registered and Bearer debentures
- Callable and Putable debentures
- Fixed and floating interest rate debentures
For detailed information about types of debentures follow the link below.
Types of Debentures | Based on various aspects
3) Rate of Returns:
The return on shares is in the form of a dividend which is not mandatory to declare every financial year and depends on whether the company makes a profit or not. The shareholders are also entitled to make a capital gain against their investment due to the stock/share market rise.
Whereas, debentures offer a fixed rate of interest to the debentures holders whether the company makes profits or not. However, debenture holders are not able to make any capital gain like shares.
4) Voting Rights:
Equity shareholders have the rights to vote during AGM (Annual General Meeting) and significant affairs of the company.
Debenture holders, on the other hand, don’t hold rights to vote during any affairs in the company.
5) Ownership:
Equity shareholders hold some proportion of ownership i.e. they are the real owner of the company whereas debenture holders are the creditor of the company.
6) Redeemability (Maturity Period):
Shares can not be redeemable at all until the company wind up its operations or gone bankrupt. Still, the shareholders are repaid after settling all the debt.
Debentures, on the other hand, are redeemable after a certain period of time called the maturity date of the debenture.
7) Security:
Shares are unsecured in nature i.e. equity shares are not backed up by any collateral as the company don’t require to create any charge on its fixed assets to float the shares in the market (or raise funds from the public).
Whereas, the company require to create a charge over its assets to issue debentures. This means debenture may or may not be secured in nature depending upon types of debentures.
8) Convertibility:
Shares cannot be converted to debenture whereas debentures can be converted to equity share provided one should hold convertible debentures.
9) What if the company wind up?
If the company winds up its operation, in this circumstance, debenture holders are prefered over shareholders at the time of realization.
On the other hand, shareholders are repaid after settling all other financial obligation.
Conclusion:
Hope the above would have helped you to understand the key differences between shares and debentures. In a nutshell, if we consider investor’s aspect debentures are secured by collateral and offer a fixed interest rate, hence carry a lower risk of defaults.
Shares, on the other hand, unsecured in nature, don’t provide a fixed dividend, however, provide the opportunity to make a capital gain in the long run due to movement in the share price. Equity share capital is the most favourable source of capital for the company point of view as it doesn’t impose any financial burden unlike debentures on the company.
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