What Are Stocks & Debentures?

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what are stocks and debentures

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.

definition of stocks

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.

SharesStocks
1. A share is a unit of capital and is transferable only in their entiretyStock is a mass of capital, any of which is transferrable
2. Shares are issuedStocks are converted from shares issued
3. Shares are numbered seriallyStocks are not numbered serially
4. Shares may be partly paidStocks are always fully paid

Now that we have the differences between shares and stocks, let’s talk about debentures.

Also Read: All forms of business organizations in Nigeria you should know

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.

stocks and debentures

The Differences Between a Debenture and Shares

The table below will give you a summary difference between debentures and Shares.

DebentureShare
1. A debenture is a certificate of indebtednessShare is a unit of capital
2. It is a loanIt is not a loan
3. Holder is a creditorHolder is one of the owners
4. Holder receives interestHolder receives dividend
5. Interest is creidted to profit and loss accountDividend is credited to appropriation account
Holder receives interest before profit distributionHolder will wait for the distribution of profit
Entitled to fixed, regular and predetermined payment of interestEntitled 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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