Difference Between Shares and Loan
Any company manages it funds by either taking loans or by issuing its shares in the market. Shares are not loans but if you analyze the concept of shares then you would see that even shares are kind of loan taken from the shareholders and in return they are given a share in the company.
Though there is hardly any scope for confusion between the two but here are the differences between them so that you can understand them clearly:
- Loans are taken from banks ad shares are issued to the public.
- Loans are to be repaid with interest which is fixed while granting the loan. Share holders get share in the company and if the company earns profit then they get their share in it but if the company does not earn profit then they do not get anything.
- Banks have legal rights and authority to get back their money while shareholders depend entirely on the share market to get profits. If a company goes into loss then they cannot do anything and their money cannot be recovered.
Companies prefer issuing shares than taking loans because loans are binding to pay but company pays the shareholders when it earns profits. We can say that share holders are sharer of and profit of the company. Shareholders also get dividends every year.
If the company does not perform then its shares dip in the market and it becomes difficult for the company to get money from the market in this case. This is why companies need to perform in both the cases.