In the stock market, shares and debentures are familiar words when it comes to investment. In business, debt and equity are the two significant methods by which they raise money for the company’s expansion and growth.
Whenever a firm chooses equity to boost funds, the shares of the company are issued to the public, and whoever buys shares gets an opportunity to be part of the company. The second is debt a company receives a loan from the public and also agrees to pay the interest regularly. There, the debenture is issued to the public and whoever buys it is known as creditors.
Here, shares are defined as the share capital of an organization. It gives the shareholder the right to hold a specified amount of the share capital of the firm. Similarly, a debenture is a great financial tool that shows the debt of a business to the outside party/public and gives a fixed interest rate. Today, most of the people invest in share or debenture intending to get back better; therefore, it is essential to understand the two securities of investments.
In this article, we will understand the meaning and difference between shares and debentures.
Also Read: What are Equity Shares?
Meaning of Debentures
A debenture is a debt tool used by a company that supports long term loans. Here, the fund is a borrowed capital, which makes the holder of debenture a creditor of the business. The debentures are both redeemable and unredeemable, freely transferable with a fixed interest rate. It is unsecured and sustained only by the issuer’s credibility.
Unlike shareholders, the debenture holders who are the creditor of the company do not hold any voting rights. The debentures are of following types:
- Secured Debentures
- Convertible Debentures
- Unsecured Debentures
- Registered Debentures
- Non-convertible Debentures
- Bearer Debentures
Must Read: What are the Types of Debentures?
Meaning of Shares
A tiny part of a firm’s capital is identified as shares and is usually sold in the stock market to raise funds for a business. The price at which the investor buys the share is known as share price. The shareholders are qualified to receive the dividend as mentioned by an organisation because they are the owner of a portion of share iv the company.
The shares are transferrable/movable and are broadly categorized into two different sections.
- Equity share
- Preference share
Quick link: What is preference share?
This article is a ready reckoner for the students to learn about what are the differences between Shares and Debentures.
What it means?
|Shares are the company-owned capital.||Debentures are the borrowed capital of the company.|
|The person who holds the ownership of the shares is called as Shareholders.||The person who holds the ownership of the Debentures is called as Debenture holders.|
Mode or return
|Shareholders are given the dividends.||Whereas, debenture holders are given interest.|
Payment of return
|Dividends can be paid to the shareholders out of profits earned by the company.||Interest can be paid to the debenture holders, regardless of if the company has earned profits.|
|Shareholders possess voting rights.||Debenture holders do not possess any right for voting.|
|Shares cannot be converted into Debentures.||However, debentures can easily be converted into Shares.|
|Trust deed is not carried out in the shares.||When the debentures are circulated to the public, a trust deed has to be carried out.|
The above mentioned is the concept, that is elucidated in detail about the Difference between Shares and Debentures for the Class 12 Commerce students. To know more, stay tuned to BYJU’S.
Important Topics in Debentures
Frequently Asked Questions on
How do you classify debentures?
Debentures can be classified in the following ways:
- Based on tenure or redemption
- Based on convertibility
- Based on security
- Based on transferability
- Based on interest rate
- Based on mode of redemption
- Based on coupon rate
Are debentures liabilities?
Debentures are considered as liabilities as they represent debts that the company needs to pay in the future. It is shown in the balance sheet as either current liabilities or long-term liabilities.
Can debentures be converted into shares?
Yes convertible debentures can be converted either partially or fully into shares after a specified period of time (at the time of redemption)