Edited by Sarah Owoeye and Toluwalase Solanke
Table of Contents
Lesson Objectives
By the end of the lesson, students should be able to:
- Define stock and debentures.
- Identify and explain the types of debentures.
- Distinguish between shares and stock, and shares and debentures.
Stock
Stock refers to the total value of fully paid-up shares held by an investor in a company. Unlike shares, which are divided into units of equal value, stock is not divided into units and represents a lump sum of ownership. It is usually created when a company converts fully paid shares into a consolidated amount, making it easier to transfer ownership in large blocks rather than in fixed units.
Differences Between Shares and Stock
| Shares | Stock |
| Divided into units of equal value. | Not divided into units. |
| Can be partly paid for. | Must be fully paid for. |
| Original form of company ownership. | Formed by combining fully paid shares. |
| Usually issued when a company is first formed. | Usually created later by converting shares. |
Debentures
A debenture is a long-term debt instrument issued by a company to raise funds from the public. It is essentially a written promise by the company to repay the borrowed amount on a specified date, along with a fixed rate of interest, which is usually paid at regular intervals. Unlike shareholders, debenture holders are not owners of the company but creditors, meaning they do not have voting rights in company decisions. Debentures may be secured against the company’s assets or unsecured, and they are often used by companies as an alternative to issuing more shares when they need additional capital.
Types Of Debentures
1. Convertible Debentures
Convertible debentures are debt instruments that give holders the right to exchange them for shares in the company after a certain period, usually at a pre-agreed rate. This means that the debenture holder starts as a creditor but may later become a shareholder if they decide to convert. Companies often issue convertible debentures to attract investors who want both the safety of fixed interest payments and the possibility of owning part of the company in the future.
2. Non-Convertible Debentures
Non-convertible debentures cannot be changed into shares under any circumstances. Holders remain creditors of the company until the maturity date, at which point the company repays the principal amount. These debentures usually offer higher interest rates than convertible ones to compensate investors for not having the option to become shareholders.
3. Redeemable Debentures
Redeemable debentures are those that must be repaid by the company on a specific date in the future. The repayment date is usually stated in the terms of the debenture. This type of debenture gives investors the assurance that they will get their money back after a fixed period, in addition to receiving interest payments during the term.
4. Irredeemable Debentures
Irredeemable debentures, also called perpetual debentures, have no fixed repayment date. The company does not have to return the principal amount until it is wound up or chooses to repay voluntarily. Holders receive interest for as long as the company exists or until repayment. This type is less common because investors usually prefer a definite repayment date.
5. Secured Debentures
Secured debentures are backed by the company’s assets, which act as security for repayment. If the company fails to repay the loan, the debenture holders have the right to sell the secured assets to recover their money. Because they are safer for investors, secured debentures usually offer lower interest rates than unsecured ones.
6. Unsecured Debentures
Unsecured debentures, also known as naked debentures, are not backed by any specific asset of the company. They are issued based only on the company’s reputation and ability to repay. In the event of liquidation, unsecured debenture holders are paid after secured creditors, which makes them riskier but often with higher interest rates to attract investors.
Differences Between Shares And Debentures
| Shares | Debentures |
| Owners of the company. | Creditors of the company. |
| Dividends depend on profits. | Interest is fixed and must be paid even if no profit. |
| Have voting rights. | No voting rights. |
| Higher risk, higher return. | Lower risk, lower return. |
Final Thoughts
Stock is the total value of fully paid-up shares held by an investor, not divided into units. A debenture is a long-term loan instrument issued by a company; holders are creditors, not owners. Types of debentures are convertible, non-convertible, redeemable, irredeemable, secured, and unsecured debentures.
Shareholders are owners with voting rights and variable dividends while debenture holders are creditors with fixed interest and no voting rights.
Tags
Stock
Paid-up Shares
Share Certificate
Debentures
Convertible Debentures
Non-Convertible Debentures
Redeemable Debentures
Irredeemable Debentures
Secured Debentures
Unsecured Debentures
Creditors
Dividends
Interest
Capital Structure
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