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

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.