Difference between Share and Debenture

Key Difference: Shares are a type of equity investment or financing and are a unit of financing. Debentures are a medium to a long term investment that allows companies to raise finance by borrowing money from citizens.

Shares and debentures are common terms when it comes to investing in a business or a firm. These both are two different types of investment that a person can make or a company can issue in order to raise capital.

Shares are a type of equity investment or financing and are a unit of financing. The term shares refer to the ability of a company to share its ownership in order to raise capital. The investor usually purchases a company’s stocks or shares, which gives him an ownership stake in the company. It is a means through which a company divides its capital.

The way an equity works is basically the investor pays the owner of the business using cash or cheque, which entitles him to shares or stocks of the company. Basically, the investor purchases these stocks or shares. The higher the number of stocks or shares, the more input the investor gets in how the business is run. The profit is usually the percentage of the required income. However, if the company is liquidated, the investors also suffer as the price of the shares would fall.

Debentures are a medium to a long term investment that allows companies to raise finance by borrowing money from citizens. They are a type of debt financing. A company issues debentures in exchange for money. This debenture is basically a promissory note stating that the company will return the principal amount, along with a percentage of the principal amount on as a monthly interest to the issuer at a future date. For example, if a debenture of 50,000 dollars is issued, with a yearly interest rate of 10% and a maturity date of 10 years. The debenture holder would receive an annual dividend of 5,000 dollars for 10 years, and upon maturity of the debenture, the debenture holder will receive the 50,000 dollars back.

Comparison between Share and Debenture:

 

Share

Debenture

Ownership

Provides ownership in the company

Does not provide ownership

Identity

Known as a shareholder

Known as a debenture holder

Returns

No certainty of returns. If company profits returns will be provided

Returns are a given. Even if company is suffering losses, it will provide a return

Convertibility

Cannot be converted into debentures

Can be converted into shares

Control

Right to participate and vote on the company’s decisions

No control or voting right provided

Losses

Will also shoulder the losses

Does not have to suffer any losses

In case of liquidation

No return on money

Debenture holders get priority in getting their money back

Issuance

Shares at discount can be issued only after observing certain legal formalities

No restriction on issue of debentures at a discount

Mortgage

Assets of the company cannot be mortgaged in favor of shareholders

Assets of the company can be mortgaged in favor of debenture holders

Interest

Not fixed, if profits are higher so is the dividend

Fixed interest rate

Image Courtesy: micky619.blogspot.com, financenmoney.in

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