Shares and debentures are both financial instruments that can be sold to investors in order to raise capital for businesses. The primary difference between them is their legal status; shares are owned by shareholders, while debentures are loans from investors to the issuer of the debenture. Shares represent part ownership in a business, while debentures are debt instruments with a fixed rate of interest paid over a pre-set period of time. Shares entitle holders to vote on company decisions, receive dividends if declared, and participate in profits earned by the company. Debentures generally do not have such voting rights or dividends attached to them but pay out regular coupon payments until maturity. Shares are financial assets that represent part ownership in a company. They are also known as equity or equities. Shares enable shareholders to share in the profits of the company and may entitle them to voting rights on certain corporate matters. Shares can be traded on exchanges such as the New York Stock Exchange (NYSE) and the Nasdaq, allowing investors to buy and sell shares within a liquid market. Shares have certain features that include liquidity, transferability, and limited liability. Shares can be bought and sold easily on exchanges or in the over-the-counter market. This means that investors are able to turn their shares into cash quickly if necessary. Shares can be transferred from one investor to another relatively easily, enabling investors to sell their shares to take advantage of profitable investment opportunities or simply exit their investments as needed. Shareholders are typically only liable up to the amount they invested in the company (e.g., the amount they paid for their shareholding). They cannot be held responsible for any losses incurred by a company beyond this level. Shares can be divided into two main types: common shares and preference shares. Common shares are the most basic type of share. They represent an ownership interest in a company, typically with voting rights in corporate matters. Common shareholders have the potential to benefit from any increase in the value of the company’s assets and may receive dividends when declared by the board of directors. Preference shares are typically more expensive than common shares and carry limited voting rights. But, they offer certain benefits that common shares do not, such as a fixed dividend rate or priority access to profits if the company is liquidated. Preference shareholders also tend to take precedence over common shareholders if there is a decrease in the value of the company’s assets. A corporation or company can generally borrow money by issuing debentures or bonds. A debenture or bond is a written acknowledgment by a company or corporation of a loan made to it. It is issued to money lenders under the seal of the corporation. It contains a contract for the repayment of the principal sum at a specified date and the payment of interest at a fixed rate until the principal sum is repaid. If you purchase a bond, you will receive a bond certificate. This certificate spells out the terms of an agreement between the issuer and the investor. These terms include the denomination or principal of the bond, its maturity date, the stated rate of interest, the interest payment terms, and any other agreements made between the borrower and lenders. Individual bonds usually have a denomination of $1,000. However, in recent years, $5,000 and $10,000 bonds have become more common. This article will assume that all bonds are in $1,000 denominations unless otherwise stated. The denomination or principal of a bond is often referred to as its face value, maturity value, or par value. It is always on this amount that the required interest payment is calculated. A total bond issue usually contains several hundred or thousands of individual bonds. For example, a $10 million bond might consist of 10,000 individual $1,000 bonds. Investors can purchase as many of these individual bonds as they wish. After a large publicly held company issues bonds, they trade on the New York Bond Exchange. It enables present and potential investors to sell and purchase bonds after their initial issue, just as they do with shares of stock. The date that the bond principal is to be repaid is called the maturity date. Bonds usually mature within 5 to 30 years from their issue date. Bonds whose entire principal is due in one payment are called term bonds, and bonds that are payable on various dates are called aerial bonds. Most bonds have a stated interest rate that is part of the bond agreement. This rate is often referred to as the nominal interest rate; it is specified on the bond when it is issued. The nominal interest rate does not change over the life of the bond. The firm’s management fixes the stated interest rate in conjunction with its financial advisers. They attempt to set the rate as close as possible to the market interest rate that exists when the bond is issued. The market rate is the money market’s interest rate through hundreds of individual transactions. The market rate is dependent on factors such as the prevailing interest rates in the economy and the perceived risk of the particular company. Most bonds pay interest semi-annually (i.e., every six months). However, the stated interest rate is an annual rate based on the face value of the bond. For example, a $1,000, 12% bond that pays interest on 2 January and 1 July will pay interest of $60 ($1,000 x .12 x 6/12) on each of these dates until it matures. In effect, the bond in this example pays 6% interest every six months. Bondholders are unable to vote for corporate management or otherwise participate in corporate affairs in the way that common shareholders do. As a result, bondholders often insist on written covenants as part of the bond agreement. These agreements are referred to as bond indentures. While they can take various forms, they usually include restrictions as to dividends, working capital, and the issuance of additional long-term debt. These agreements aim to ensure that the borrower will maintain a strong enough financial position to meet the interest and principal payments. Various kinds of debentures that a corporation may issue. Simple debentures are those carrying no security as to the payment of interest or repayment of the principal sum. The holders of these are considered insecure, so these are not popular in the present day. Simple debentures are also called naked debentures. Mortgage debentures are secured by a charge on the corporation’s assets, such as plants, machinery, equipment, land, and buildings. Mortgage debentures are of the following two types: First mortgage debentures are those for which the holders have the first claim on the assets charged. Second mortgage debentures are those for which the holders have a second claim on the assets charged. The amount of bearer debentures is payable to the bearer. They are negotiable instruments and are transferable by mere delivery. The names and addresses of these debenture holders are recorded in the corporation’s books. Transfer of these debentures must be registered in the books of the corporation, as in the case of shares. Interest is paid to registered holders. These are debentures that are repayable at the end of a specified period. They are issued subject to the corporation’s condition to redeem them on a specified date. These debentures are very common nowadays. These debentures are never repayable during the existence of the corporation. That is to say, they are only repayable on the corporation’s liquidation. These debentures may be converted into ordinary shares or preference shares of the company. This option is given to the debenture holder for the period mentioned in the conditions of the issue. A company raises money by issuing shares. Debentures are one way in which a company can raise long-term finance. The primary difference between issuing debentures and shares is that debentures are loan instruments and not equity instruments and represent a loan to be repaid by the company with interest at a fixed rate. On the other hand, shares represent ownership interests and voting rights. Debenture holders are creditors of the company, while shareholders are owners of the company. When a company issues debentures, it borrows money and incurs a liability. When a company issues shares, it sells ownership interests and does not incur liability. In conclusion, shares and debentures are the two main sources of external finance for a company. Shares represent part ownership in a company and give investors the ability to access liquidity, transferability, and limited liability. Debentures are debt securities issued by companies to fund their operations with investor funds, usually with an agreement that the debt will be repaid at a later date along with interest payments. Both types of investments offer advantages and risks for investors to consider before making any decisions. It is important for investors to understand the differences between shares and debentures before investing their money in either one. Ultimately, it is up to each individual investor to decide which financial instrument best suits their needs and risk tolerance. Shares and Debentures Overview
Definition of Shares
Features of Shares
Liquidity
Transferability
Limited Liability
Types of Shares
Common Shares
Preference Shares
Definition of Debentures
Features of Debentures or Bonds
Denomination of the Bond
Maturity Date
Stated Interest Rate and Interest Payment Dates
Other Agreements
Types of Debentures or Bonds
Simple or Naked Debentures or Bonds
Mortgage Debentures or Bonds
First Mortgage Debentures
Second Mortgage Debentures
Bearer Debentures or Bonds
Registered Debentures or Bonds
Redeemable Debentures or Bonds
Irredeemable Debentures or Bonds
Convertible Debentures or Bonds
Difference Between Issuing Shares and Debentures
Conclusion
Shares and Debentures FAQs
The primary difference between issuing debentures and shares is that debentures are loan instruments and not equity instruments and represent a loan to be repaid by the company with interest at a fixed rate. On the other hand, shares represent ownership interests and voting rights. Debenture holders are creditors of the company, while shareholders are owners of the company. When a company issues debentures, it borrows money and incurs a liability. When a company issues shares, it sells ownership interests and does not incur liability.
Yes, both types of investments offer advantages and risks for investors to consider before making any decisions. It is important to understand the differences between shares and debentures before investing in either one. Risk factors may include, but are not limited to, market volatility, credit risk (with regards to fixed-income securities), liquidity risk, and inflationary pressures. Ultimately, it is up to each individual investor to decide which financial instrument best suits their needs and risk tolerance.
There are several different types of debentures that companies can issue: registered debentures or bonds; redeemable debentures or bonds; irredeemable debentures or bonds; and convertible debentures. Each of these has different terms and conditions associated with it and should be carefully reviewed before investing in any of them.
Yes, many debentures have an option for conversion into ordinary or preference shares of the company during a certain period mentioned in the conditions of the issue. However, this option is at the discretion of the issuer and may not always be available. Investors should check with the issuer to determine if such an option exists.
Bonds or debentures can be bought directly from issuers on primary markets, traded on secondary markets, or purchased through financial advisors or brokers. When selling securities, investors must ensure they are done so at fair market value to avoid incurring losses due to price fluctuations.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
