Shares and debentures are the two financial instruments which are used by the company to raise capital from the market; however both shares and debenture are like fire and water that is they are quite different from each other. In order to understand it better let’s look at some of the differences between shares and debentures –
Differences between Shares and Debentures
Ownership and Debt
The first and foremost difference between share and debenture is that while shares represent equity or ownership of the company while debenture represents the debt of the company and that is the reason why shareholder is called the owner of the company while debenture holder is called the creditor of the company.
Shares carry voting rights which in turn give them right to vote when it comes to deciding important matters of the company like selection of directors, amalgamation or merger of the company, purchase of new company by the company and so on whereas debentures do not carry any voting rights and hence they do not have any say in the important matters of the company.
Dividends and Interest
Shares are entitled to receive dividends from the company in the event of the profit made by the company while debentures are entitled to receive interest from the company no matter whether the company makes profit or loss. Hence, in simple words the income of shareholder will be volatile that is it will be high in case of good profits by the company and nil in case of loss by the company whereas the income debenture holder is fixed as it is not dependent on the profits of the company.
Permanent Source of Finance
Shares are a permanent source of finance for the company because they remain with the company as long as the company is running whereas debentures are not a permanent source of finance as they have the time limit after which the company has to repay it to the debenture holders or convert it into equity shares.
Types or Variants
Shares are basically of two types that are equity shares and preference shares whereas debentures are of many types like redeemable debentures, convertible debentures, non-convertible debentures and so on.
In the event of liquidation of the company, debenture holders are paid first whereas equity shareholders are paid in the last. Hence in simple words capital of secured debentures is safe whereas capital of equity shareholder in the event of liquidation is not safe.
As one can see from the above that both shares and debentures are different from each other but at times they complement each other for the company just as ice and water do during the summer season.