Share, Debenture and Bond | Introduction & Differences

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what is share debenture and bond

What is Share Capital?

A share capital amount of money raised by issuing the share by a company. The shareholders are the owner of the company. The total share capital is divided into small parts and each part is called a share. Share is the smallest part of the total capital of the company. The share capital remains with the company as long the company runs.

Features of the Share Capital

  • Share is a long term financial source of the company.
  • Share capital is also called owned capital because shareholders are the owner of the company.
  • Share provides substantial funds to the company.
  • It gives its shareholders an opportunity to participate in the company’s management with the normal right of the shareholder.
  • It gives benefit to shareholders

Types of Share Capital 

  1. Equity Share Capital
  2. Preferences Share Capital 

Equity Share Capital

  • Equity share is also known as an ordinary share.
  • Equity shareholders are the real owners of the company.
  • They have the voting right in the AGM so they have control over the company.
  • These shareholders take more risk than preference shareholder.
  • The rate of dividend on these shares depends upon the profits of the company.
  • Is cannot be redeemed during the lifetime of the company (remain permanently with the company).
  • It is considered to be the riskiest investment,
  • In case of the liquidation, the equity share capital will be paid last after the payment is made to creditors & preference shareholders.

Advantages and Disadvantages of Equity Share

AdvantagesDisadvantages
It is permanent source of capital.As equity share can not be redeemed, there is danger of over capitalization.
Equity share do not create any obligation of paying fixed rate of dividend.Equity shareholders can put obstacle for management by manipulation.
Shareholders have the right to vote for the selection os BOD.During prosperous periods, higher dividend have to paid leading to increase the value of shares in the market and it leads to speculation.
In case of high profits, equity share holders are the real gainer.Investors who desire to invest in safe securities with a fixed income have no attraction for such shares.

Preference Share Capital

  • A preference share is a long term source of finance for a company.
  • It has a fixed rate of dividend. Shareholder carries a preferential right over ordinary equity shares in sharing of profits and also claim over assets of the firm.
  • A preference share is also called “hybrid financing instruments” as it has elements of both equity share and debt.
  • It has a fixed rate of dividend.
  • The shareholder does not hold voting right.
  • Just like debt, preference shares also have a fixed maturity period. On the date of maturity, the preference capital has to be paid to shareholders. (redeemable preference shares do not have maturity)

Advantages and Disadvantages Preference Share 

AdvantagesDisadvantages
Helpful for raising long term capital for a companyCompany have to pay fixed rate of dividend before paying other shares.
Rate of return in guaranteed.No rights for voting and control power.
Redeemable preference share have the added advantages of repayment of capital whenever there is surplus in company.Cost of raising preference share is comparatively high.

What is Debenture?

A public limited company is allowed to raise debt or loan through debentures after getting a certificate of commencement of business if permitted by MOA. Unlike share capital, debentures are also part of the capital for a company issued to the public at a premium or at a discount.

Features of Debenture

  • It is written documents
  • Creditor-ship certificate
  • Fixed maturity period
  • Long term and major capital source
  • No voting right and control in the management
  • It is a cheap source of capital

Types of Debenture

  • Redeemable and Irredeemable Debentures
  • Secured and Unsecured Debenture
  • Registered and Bearer Debenture
  • Convertible and Non-convertible Debenture

Difference Between Share and Debenture

SharesDebentures
The shares are the owned funds of the company.The debenture are the borrowed fund of the company.
Share represents the capital of the company.The debenture represents the debt of the company.
The holder of the shares is known as shareholders(owners). The holder of the debenture is called debenture holder (Creditors).
Shareholders get dividend.Debenture holders get interest.
Dividend has to be paid to shareholders only if company makes profit.Interest has to be paid to debenture holder even if there is no profit of company.
Shareholders have voting right in AGM.Debenture holder do not have voting right in AGM.
Shares can not be converted into debenture.Debenture can be converted to shares.
Shareholder are risk taker.Debenture holders are not risk taker.

What is Bond?

Bond is a financial security issued by a company or by the government as a means of borrowing long-term funds.

A bond is debt investment in which an investor loans money to an entity (usually corporate or government) which borrows the finds for a definite period of time at a variable or fixed interest rate.

Features

  • Long term source of finance.
  • Has fixed maturity period and interest rate.
  • Issued by company, government, state, municipalities.

Difference between bonds and debenture

BondsDebentures
Bond is a financial security issued by a company or by the government as a means of borrowing long-term funds.A debt instrument used to raise the long term finance.
Generally secured by collaterals.May be secured on unsecured.
Interest rate is low.Interest rate is high.
Issued by Government agencies, corporations.Issued by companies.
Accrued payment system.Periodical payment system.
Called bond holders.Called debenture holders.
It gets first priority in repayment at the time of liquidation.It gets second priority in repayment at the time of liquidation.