Hmm, so what are stocks and debentures?
In my previous post, I explained what shares of a company are, and the various types of shares.
A share is simply the individual portion of the company’s capital owned by shareholders. It is the interest which a shareholder has in a company.
But in this article, we’ll focus on stocks, debentures, differences between stocks and debentures, and how stocks differs with shares.
So, What Are Stocks?
Simply put, stocks are a bundle of shares or mass of capital which can be transferred in factional amounts.
Stocks are always fully paid, for example stocks can be quoted N100 nominal value. It is a collection of shares into a bundle.
The key point here is, stocks are not issued, but are converted from shares issued. The following table will give you more insight into how stocks differ from shares.
|1. A share is a unit of capital and is transferable only in their entirety||Stock is a mass of capital, any of which is transferable|
|2. Shares are issued||Stocks are converted from shares issued|
|3. Shares are numbered serially||Stocks are not numbered serially|
|4. Shares may be partly paid||Stocks are always fully paid|
Now that we have the differences between shares and stocks, let’s talk about debentures.
A debenture is a bond, acknowledging a loan, generally under the company’s seal and bearing a fixed rate of interest. It is usually giving security for the payment of the interest.
In other words, debenture is a document setting out the terms of a loan to a company, i.e a certificate of indebtedness.
Holders of debentures can not share from the profit of the company.
Types of Debentures
We have the following types of debentures.
1. Mortgage Debentures
Mortgage debentures are issued on the security of company’s assets. It gives a charge upon the whole or part of the company’s asset upon liquidation.
2. Simple or Naked Debentures
Where there is no charge created on the company’s property or assets, the debenture is descried as naked or simple. In this case, there is no security for the debenture.
3. Secured Debenture
Secured debenture is the type of debenture whose repayment is guaranteed through a collateral security tendered by the borrower.
4. Redeemable Debenture
Redeemable debenture is repayable at a date which has been fixed or determined. A company may issue debentures which are liable to be redeemed.
5. Irredeemable Debenture
Irredeemable debenture is repayable only in the event of some specified contingency, such as winding up of the company.
It cannot be cashed at any time and it is bough solely for interest payments.
The Differences Between a Debenture and Shares
The table below will give you a summary difference between debentures and Shares.
|1. A debenture is a certificate of indebtedness||Share is a unit of capital|
|2. It is a loan||It is not a loan|
|3. Holder is a creditor||Holder is one of the owners|
|4. Holder receives interest||Holder receives dividend|
|5. Interest is creidted to profit and loss account||Dividend is credited to appropriation account|
|Holder receives interest before profit distribution||Holder will wait for the distribution of profit|
|Entitled to fixed, regular and predetermined payment of interest||Entitled to dividends that may vary with the profits|
There you have it, all about stocks and debentures, types of debentures, and the differences between these terms in company formation.
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