Difference Between Shareholder and Debenture Holder

Companies, legal organisations, and governments can raise money in many ways. This implies that different types of capital structures may be created depending on an individual's appropriateness. It may contain various elements, including debt money, reserves, and share capital. 

As a result, it is recognised that shares and debentures are among the most commonly used terminology for generating money or making investments. In recent years the share market has sharply increased the investment of shares and debentures. Let's examine these definitions and the difference between debenture holders and shareholders. 

What Exactly Are Shares?

By becoming a shareholder or stakeholder in a firm, we can partially acquire ownership by using shares. Simply said, they are the lowest component of a company's capital structure. 

When a business decides to list itself on the stock exchange to raise capital through an IPO (Initial Public Offering) or simply goes public, it enables the market's investors to purchase their issued shares, become a stakeholder in the business, and take advantage of several rights, advantages, and benefits provided by the company's memorandum.

Shares fall under the following categories:

Equity Shares, also known as Common Shares, are traded on the stock market. The dividend rate is not set and is irredeemable, and they provide its owners voting rights.

Preference Shares, as their name implies, give their owners priority over equity shareholders concerning dividend payments from the corporation. In the hierarchy of capital distribution following the payment of creditors, they provide shareholders preference if the firm is ever liquidated. 

What Exactly Are Debentures?

In contrast to shares, referred to as owned capital, debentures are long-term financial loan instruments. They are also referred to as borrowed capital. Since it is borrowed money for a business, it may be considered a loan the business takes to obtain money from investors, which must be repaid with interest within a set time. 

These interest components are often regular and grant the buyer the status of a firm credit holder, which is superior to that of a shareholder.

This indicates that in the event of a future corporate dissolution or liquidation, the company's creditors would be paid first and the shareholders, including those owning preferred stock.

Debentures fall under the following categories:

Debentures can be secured or unsecured; secured debentures carry a charge on the company's assets. As a result, holders of secured debentures may utilise the company's mortgaged assets to recover unpaid principal or interest. On the other hand, Unsecured Debentures do not fulfil any of the aforementioned roles.

Debentures can be either redeemable or non-redeemable. With a redeemable debenture, the principal sum is redeemed within a predetermined time frame. Unlike non-redeemable debentures, which don't provide investors with this option. 

Other classifications include first and second debentures, registered and bearer debentures, convertible and non-convertible debentures, and more. 

Difference between Shareholder and Debenture Holder

1. A company's owned capital is known as share or share capital, while its responsibility to the debt provider or creditor is known as a debenture.
2. The issuance of shares is required when going public to investors, but the issuance of debentures is optional.
3. Owners of shares are entitled to dividend rights, while owners of debentures are entitled to the interest payment component.
4. Debenture holders are creditors to the firm rather than owners of the capital with voting rights, hence they do not have the same management rights as shareholders.
5. While this conversion option is unavailable to shareholders, convertible debentures allow the owner to convert into shares or other kinds of ownership capital.
6. The shareholder's fund is listed in the shareholder's fund part of the balance sheet. Debentures, on the other hand, are classified under long-term obligations in the non-current liabilities section.

Conclusion

The roles and privileges that each has within a firm constitute the primary difference between shareholder and debenture holder. So, as an investment tool and method of obtaining cash, both shares and debentures are good financial assets and tools. They both outperform in their ways and have different roles and advantages. The first offers a portion of the earnings, while the second offers priority and interest income. 

To maximise their returns and reduce risk as may be appropriate, real-time investors must know if their investing goals are to do so. Now, having a demat account is a need regardless of whether you wish to invest in a company's shares or its financial instruments. Go to the blinkX website or download their blinkX demat app  to get started on your trade journey.