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
- Ordinary Shares: Also known as common shares, holders of these shares receive dividends after all other types of shares have been paid.
- Preference Shares: Shareholders with these shares receive preferential treatment in dividend distributions.
- Cumulative Preference Shares: Holders have the right to claim any unpaid dividends in subsequent years.
- Non-Cumulative Preference Shares: Unlike cumulative preference shares, these do not allow the accumulation of unpaid dividends.
- Participating Preference Shares: Holders enjoy dividends alongside ordinary shareholders after other obligations are met.
- Redeemable Preference Shares: Company owners have the right to buy back these shares after a predetermined period.
- 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.
Types of Debentures
- Mortgage Debentures: They are secured against the company’s assets or property, providing security to the debenture holders.
- Naked or Simple Debentures: In contrast to mortgage debentures, these debentures are unsecured and lack any collateral backing.
- 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.
- Irredeemable Debentures: These debentures lack a fixed maturity date for repayment. They provide the company with flexibility regarding repayment schedules.
Differences between Shares and Debentures
| Shares | Debentures |
|---|---|
| It is a unit of capital allocated to an individual | It is a certificate representing the company’s debt to the holder |
| It is not a loan | It represents a loan |
| A shareholder is the owner of a public company | The debenture holder is a creditor to the company |
| The shareholder receives a share from the profits | The debenture holder receives interest |
| The holder may or may not receive anything without profit | The holder receives interest regardless of company profit |
| Holder has liability in the company | Holder has no liability |
| The holder receives dividend after interest payment | The holder receives interest before dividend distribution |
Similarities between Shares and Debentures
- Issued by a Company: Both shares and debentures can be issued by a company as part of its financing strategies.
- Tradeability: They can be bought and sold in the financial market. This allowing for transferability between investors.
- Offered for Capital Generation: Companies use both shares and debentures as means to raise funds or capital for various business needs.
- 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.