What is a share?

A share is literally your share of a company. Imagine a company worth Rs.1,00,000. You want to invest in
that company, but you don’t have Rs.1,00,000 to buy it, or maybe the sellers don’t want to sell all of the
company. Buying shares in that company lets you own some of the company, instead of all of it.

How shares work

To make it possible for you to buy shares, the current owners of the company would agree to break the
company into, say, 10 000 shares, each worth Rs10. The value of the company remains at Rs100 000 (Rs.10
share price x 10 000 shares), but you can now buy one share in the company at Rs10, or five shares at
Rs.50.

Basis for
Shares Debentures
Comparison
The shares are the owned funds of The debentures are the borrowed
Meaning
the company. funds of the company.
Shares represent the capital of the Debentures represent the debt of
What is it?
company. the company.
The holder of shares is known as The holder of debentures is known
Holder
shareholder. as debenture holder.
Status of Holders Owners Creditors
Form of Return Shareholders get the dividend. Debenture holders get the interest.
Dividend can be paid to Interest can be paid to debenture
Payment of return
shareholders only out of profits. holders even if there is no profit.
Dividend is an appropriation of Interest is a business expense and
Allowable deduction profit and so it is not allowed as so it is allowed as deduction from
deduction. profit.
Security for payment No Yes
The holders of shares have voting The holders of debentures do not
Voting Rights
rights. have any voting rights.
Shares can never be converted into Debentures can be converted into
Conversion
debentures. shares.
Debentures get priority over shares,
Repayment in the Shares are repaid after the payment
and so they are repaid before
event of winding up of all the liabilities.
shares.
Dividend on shares is an Interest on debentures is a charge
Quantum
appropriation of profit. against profit.
 Basis for
Shares Debentures
Comparison
When the debentures are issued to
No trust deed is executed in case of
Trust Deed the public, trust deed must be
shares.
executed.

Definition of Shares

Smallest division of the company’s capital is known as shares. The shares are offered for sale in
the open market, i.e. stock market to raise capital for the company. The rate on which the shares
are offered is known as share price. It represents the portion of ownership of the shareholder in
the company. The shareholders are entitled to the dividend (if any) declared by the company on
the shares.

The shares are movable i.e. transferable and consist of a distinctive number. The shares are
broadly divided into two major categories:

 Equity Shares: The shares which carry voting rights on which the rate of dividend is not
fixed. They are irredeemable in nature. In the event of winding up of the company equity,
shares are repaid after the payment of all the liabilities.
 Preference Shares The shares which do not carry voting rights, but the rate of dividend is
fixed. They are redeemable in nature. In the event of winding up of the company,
preference shares are repaid before equity shares.

Definition of Debentures

A long-term debt instrument issued by the company under its common seal, to the debenture
holder showing the indebtedness of the company. The capital raised by the company is the
borrowed capital; that is why the debenture holders are the creditors of the company. The
debentures can be redeemable or irredeemable in nature. They are freely transferable. The return
on debentures is in the form of interest at a fixed rate.

Debentures are secured by a charge on assets, although unsecured debentures can also be issued.
They do not carry voting rights. The debentures are of following types:

 Secured Debentures
 Unsecured Debentures
 Convertible Debentures
 Non-convertible Debentures
 Registered Debentures
 Bearer Debentures

Key Differences Between Shares and Debentures

The following are the major differences between Shares and Debentures:
 1. The holder of shares is known as a shareholder while the holder of debentures is known
as debenture holder.
2. Share is the capital of the company, but Debenture is the debt of the company.
3. The shares represent ownership of the shareholders in the company. On the other hand,
debentures represent indebtedness of the company.
4. The income earned on shares is the dividend, but the income earned on debentures is
interest.
5. The payment of dividend can be made only out of current profits of the business and not
otherwise. Unlike the interest on debentures which has to be paid by the company to
debenture holders, no matter company has earned profit or not.
6. Dividend is not a business expense and so is not allowed as deduction. On the contrary,
interest on debentures is a expense and so allowed as a deduction.
7. In the event of winding up, debentures get priority of repayment over shares.
8. Shares cannot be converted as opposed to debentures are convertible.
9. There is no security charge created for payment of shares. Conversely, security charge is
created for the payment of debentures.
10. A trust deed is not executed in case of shares whereas trust deed is executed when the
debentures are issued to the public.
11. Unlike debenture holders, shareholders have voting rights.
12. Shares are issued at a discount subject to some legal compliance. Debentures can be
issued at a discount without any legal compliance.

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Similarities

 Both are Financial Asset.

 Both can be issued to the public.
 Source of raising money for the company.
 They can be issued at the discount.

Conclusion

As everything has two aspects, shares and debentures also have its merits and demerits. While
shares are give voting rights to the shareholders, debentures get priority in payment, at the time
of winding up of the company. Financing is the basic requirement of every big and small-sized
organization. Funds can be raised by issuing debt or equity instruments. When it is about debt
instruments, two major sources of raising external finance are used by the companies; are Bonds
and Debentures. In many countries, they are supposed to be one but the two terms differ in many
regards. Bonds are generally issued by government agencies and large corporations, but public
companies issue debentures, to raise money from the market.

Financing is the basic requirement of every big and small-sized organization. Funds can be
raised by issuing debt or equity instruments. When it is about debt instruments, two major
sources of raising external finance are used by the companies; are Bonds and Debentures. In
many countries, they are supposed to be one but the two terms differ in many regards. Bonds are
generally issued by government agencies and large corporations, but public companies issue
debentures, to raise money from the market. Bonds and debentures are two financial assets which
are issued by the borrowing company, for a price which is equal to, less than or more than its
face value, but they are not one and the same. There are many differences between bonds and
debentures which are discussed in tabular form, in this article below.

Bonds Debentures
Basis for Comparison

A bond is a financial instrument showing A debt instrument used to raise

Meaning the indebtedness of the issuing body long term finance is known as
towards its holders. Debentures.

Yes, bonds are generally secured by Debentures may be secured or

Collateral
collateral. unsecured.

Interest Rate Low High

Government Agencies, financial

Issued by Companies
institutions, corporations, etc.

Payment Accrued Periodical

Owners Bondholders Debenture holders

Risk factor Low High

Priority in repayment at
First Second
the time of liquidation

A financial instrument which shows the obligation of the borrower towards the lender is known
as Bond. They are created to raise funds for the company or government. It is a certificate,
signifying a contract of indebtedness of the issuing company, for the amount lent by the
bondholders.

In general, bonds are secured by collateral, i.e. an asset is pledged as security that if the company
fails to pay the sum within stipulated time, the holders can discharge their debts by seizing and
selling the asset secured.

Bonds are issued for a fixed period, which carries interest known as ‘coupon.’ The interest needs
to be paid at regular intervals, or it will accrue over time. They are issued by public sector
undertaking, government firms, large corporations, etc. The issue of government bonds is done
in auctions where members bid for the bonds. The principal amount of the bonds is to be paid at
a future specified date known as maturity date. Some common types of bonds are as under: