Difference Between Shares and Debentures

Shares and debentures both are ways to raise capital; however, debentures are borrowed capital, whereas shares are a portion of the company’s capital itself.  Covered ahead are the key differences between shares and debentures for your understanding

Understanding Shares and Debentures

• About Shares

Shares are small divisions of a company's capital. When a company goes public for the first time and gets listed on the stock exchanges to raise capital from the market, investors buy a share or number of shares in the company.

Purchasing the shares gives shareholders an entitlement to the ownership of the company. In other words, you become owners of the company in proportion to the percentage of shares you own. Shareholding of 50% or more makes the shareholders the biggest owners of the company whereas other shareholders get an entitlement to the ownership.

Primarily, these are types of shares that a company issues-

• Equity Shares: Equity shares are the shares that are traded on the stock exchange. They are also called ordinary shares.
  
  
• Preference Shares: Preference shares are shares that give ‘preference’ to its shareholders to the dividends of the company ahead of equity shareholders. 

About Debentures

Debentures are long-term debt instruments that a company issues under its seal. One difference between shares and debentures is that debentures become borrowed capital for the company.

It is like a loan that a company has taken from the debenture holders which it is supposed to pay back with interest in due time.

Debenture holders are creditors to the company. The money invested by debenture holders is basically borrowed capital for the company that it has to pay back with regular interest. This makes debenture holders creditors to the company and at a higher status than shareholders. 

There are five different types of debentures-

• Registered and bearer debentures
• Secured and unsecured debentures
• Redeemable and non-redeemable debentures
• First and second debentures
• Convertible and non-convertible debentures

Shares vs Debentures - How are they Different?

Here is a table that summarises the difference between shares and debentures on various parameters.