Shares, Bonds and Debentures – SS1 Economics Lesson Note (Second Term)

Shares and debentures are two ways a company raises money. A share is a unit of the company’s capital, and the buyer becomes a part-owner. A debenture is a loan to the company, and the lender receives a fixed rate of interest. A bond is a similar loan, usually to a government, repaid with interest on a stated date.

Behavioural objectives

By the end of the lesson, students should be able to:

1. Define a share, a debenture and a bond.
2. Name the types of shares and state the features of each.
3. Name the types of debenture.
4. State the differences between shares and debentures.
5. Say where shares, debentures and bonds are bought and sold in Nigeria.

What is a share?

A share is a unit of the capital of a company allocated to an individual. The money a company raises by selling shares is called its share capital. People who buy shares are called shareholders, and each shareholder owns part of the company.

A public limited company can offer its shares to the general public. A private limited company cannot. Shareholders receive part of the profit as a dividend. The dividend depends on the profit the company makes, so it can rise, fall or not be paid at all.

Ordinary shares

• The holders are the real owners of the company and are called equity holders.
• The dividend is not fixed. It is paid after the preference shareholders have been paid, and it depends on profit.
• The holders usually have the right to vote at the annual general meeting (AGM).
• The risk is higher, because there may be no dividend in a year of poor profit.

Preference shares

• The dividend is paid at a fixed rate, and it is paid before the ordinary shareholders receive anything.
• The holders usually have no right to vote.
• If the company is wound up, preference shareholders are paid back before ordinary shareholders.

Preference shares come in different kinds:

• Cumulative: a dividend that is not paid in one year is carried forward and paid later.
• Redeemable: the company may buy the shares back on a later date.
• Convertible: the holder may change the shares into ordinary shares.

What is a debenture?

A debenture is a document issued by a company to show that it has borrowed money from the holder. The company promises to repay the sum on a stated date and to pay a fixed rate of interest. A debenture holder is a creditor of the company, not an owner.

Features of a debenture

1. Interest is fixed and must be paid whether or not the company makes a profit.
2. The holder has no right to vote.
3. The loan is repaid on a stated date.
4. If the company is wound up, debenture holders are paid before shareholders.

Types of debenture

• Secured debenture: backed by the assets of the company. If the company cannot pay, the assets can be sold to repay the holders.
• Unsecured debenture: not backed by any asset. The holder relies on the promise of the company.
• Redeemable debenture: repaid on a stated date.
• Irredeemable debenture: has no fixed date for repayment.
• Convertible debenture: the holder may change it into shares.

What is a bond?

A bond is a long-term loan to a government or a company. The issuer pays interest, often twice a year, and repays the face value on a stated date called the maturity date. In many cases a bond and a debenture mean much the same thing. The word debenture is mostly used for a company’s loan, and bond for a government’s.

In Nigeria, the Federal Government borrows from the public by issuing Federal Government of Nigeria (FGN) bonds. State governments and companies also issue bonds.

Differences between shares and debentures

Where are shares, debentures and bonds bought and sold?

Shares, debentures and bonds that have already been issued are traded on the stock exchange. In Nigeria this is the Nigerian Exchange (NGX) in Lagos. Buyers and sellers deal through licensed stockbrokers. The Securities and Exchange Commission (SEC) regulates the market.

Evaluation

1. Define a share and a debenture.
2. State three differences between an ordinary share and a preference share.
3. Name two types of debenture.
4. State three differences between a share and a debenture.
5. Which body regulates the capital market in Nigeria?

Assignment

1. Draw the table of differences between shares and debentures from memory, then check it against the note.
2. A company made no profit this year. Say which holders must still be paid, shareholders or debenture holders, and give a reason.