Shares and Debentures

While different in nature, both shares and debentures provide certain rights or entitlements to their holders within the structure set by the issuing company.

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Shares

A share is a unit of capital in a company that is allocated to an individual to represent ownership in the company. Shares serve as a form of investment through which individuals hold ownership stakes in a company, entitling them to certain rights and benefits based on the type of shares held. They signify ownership and participation in a company’s growth and success.

Types of Shares

  1. Ordinary Shares: Also known as common shares, holders of these shares receive dividends after all other types of shares have been paid.
  2. Preference Shares: Shareholders with these shares receive preferential treatment in dividend distributions.
  3. Cumulative Preference Shares: Holders have the right to claim any unpaid dividends in subsequent years.
  4. Non-Cumulative Preference Shares: Unlike cumulative preference shares, these do not allow the accumulation of unpaid dividends.
  5. Participating Preference Shares: Holders enjoy dividends alongside ordinary shareholders after other obligations are met.
  6. Redeemable Preference Shares: Company owners have the right to buy back these shares after a predetermined period.
  7. Deferred or Founder’s Shares: The original owners and promoters hold deferred or founder’s shares, which grant them specific management or control rights within the company.

Debentures

A debenture is a certificate issued by a company to an individual to acknowledge the company’s debt to the holder. It serves as a formal acknowledgment of the company’s obligation to repay the amount mentioned in the debenture certificate, typically with specified interest over a designated period. Debentures serve as a form of long-term borrowing for the company and often come with fixed terms and conditions for repayment.

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Types of Debentures

  1. Mortgage Debentures: They are secured against the company’s assets or property, providing security to the debenture holders.
  2. Naked or Simple Debentures: In contrast to mortgage debentures, these debentures are unsecured and lack any collateral backing.
  3. Redeemable Debentures: They are agreed upon by the company to be repaid on or before a fixed date with a clear timeline for loan repayment.
  4. Irredeemable Debentures: These debentures lack a fixed maturity date for repayment. They provide the company with flexibility regarding repayment schedules.
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Differences between Shares and Debentures

SharesDebentures
It is a unit of capital allocated to an individualIt is a certificate representing the company’s debt to the holder
It is not a loanIt represents a loan
A shareholder is the owner of a public companyThe debenture holder is a creditor to the company
The shareholder receives a share from the profitsThe debenture holder receives interest
The holder may or may not receive anything without profitThe holder receives interest regardless of company profit
Holder has liability in the companyHolder has no liability
The holder receives dividend after interest paymentThe holder receives interest before dividend distribution

Similarities between Shares and Debentures

  1. Issued by a Company: Both shares and debentures can be issued by a company as part of its financing strategies.
  2. Tradeability: They can be bought and sold in the financial market. This allowing for transferability between investors.
  3. Offered for Capital Generation: Companies use both shares and debentures as means to raise funds or capital for various business needs.
  4. Rights or Entitlements: While different in nature, both shares and debentures provide certain rights or entitlements to their holders within the structure set by the issuing company.
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