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Financial markets provide several instruments for investors. Among these, shares and debentures are two popular options. Both of these cater to different financial goals and risk preferences of investors.
Shares represent ownership in a company, potentially offering voting rights and dividends. Debentures are a type of loan issued by the company, backed often by the company’s general creditworthiness.
Understanding the differences between shares vs debentures can help investors choose the most appropriate investment option that aligns with their expected return and level of risk exposure. In this blog, we will understand in detail what is shares and debentures and the difference between the two.
What are Shares?
Shares represent ownership in a company. When you purchase shares, you essentially buy a portion of the company. Shares are generally classified into 2 main types:
1. Equity Shares
Also known as ordinary shares, these are traded on the stock exchange. Holders of equity shares have the right to vote at shareholders’ meetings. If the company earns profits, equity shareholders can receive a part of it in the form of dividends.
2. Preference Shares
These shares give preferential rights to their owners as compared to equity shares. These shares offer fixed dividends. Holders of preference share typically do not possess voting rights.
Key characteristics of shares include:
· Ownership
Shareholders own a portion of the company. This entitles them to a share of the company’s assets and profits.
· Voting Rights
Equity shareholders actively participate in decision-making by voting on company policies and selection of board members.
· Dividends
Depending on financial performance, in the years the company makes profits a part of it can be distributed to shareholders in the form of dividends.
What are Debentures?
Debentures are a type of debt instrument that companies issue under their seal. Unlike shares, debentures do not confer any ownership in the company.
Debentures serve as borrowed capital for the company. When companies issue debentures, they borrow funds from debenture holders, promising repayment with interest. Hence, debenture holders are creditors to the company.
There are generally 5 types of debentures:
1. Registered and bearer debentures
Registered debentures are recorded in the holder’s name. Bearer debentures are not recorded in the holder’s name and are transferable by delivery.
2. Secured and unsecured debentures
Secured debentures are backed by specific assets. Unsecured debentures lack the safety of collateral.
3. Redeemable and non-redeemable debentures
Redeemable debentures come with a specific repayment date. Non-redeemable debentures do not have any specific repayment date and hence are also called perpetual debentures.
4. First and second debentures
In case of liquidation or repayment of debentures, first debentures hold priority over second debentures.
5. Convertible and non-convertible debentures
Convertible debentures can be exchanged for or converted into shares. Non-convertible debentures lack this conversion option.
Key characteristics of debentures include:
· Loan Agreement
Debentures signify a contractual loan agreement between the issuer and the investor, obligating the issuer to repay the principal with agreed interest.
· Interest Payments
Investors receive fixed interest payments regardless of the company’s profitability.
· Security
The security of debenture holders varies based on whether the debentures are secured or unsecured. This impacts their risk profile.
Understanding the difference between shares and debentures
The fundamental differences between shares vs debentures can significantly influence an investor’s decision. Here are the key differences between debentures vs shares or equity shares vs debentures:
| Parameters | Shares | Debentures |
| Meaning | Small portions of a company’s capital | Long-term debt instruments that a company issues under its seal |
| Nature of Capital for the Company | Owned capital | Borrowed capital |
| Returns | Dividends are issued only out of profits. | Interest payments do not depend on profits; may be fixed or floating |
| Risk | Shares carry a higher risk because their value is closely tied to the company’s performance and broader market fluctuations. | Fixed interest payments are made to debenture holders, offering a predictable return. |
| Investors | Investors who hold shares have partial ownership of the company. | Those who hold debentures act as creditors to the company. |
| In Case of Liquidation | Given the last priority in asset distribution | Creditors, including debenture holders, are paid off first |
| Voting Rights | Yes | No |
| Convertibility | Cannot be converted into debentures | Can be converted into shares |
| Market Influence | Price is more volatile, influenced by market conditions. | Less influenced by market conditions; more stable pricing. |
Debenture vs bond vs share
While we have understood the difference between debentures vs shares let us understand how bonds differ from these.
Similar to debentures, bonds represent debt investments. When you buy a bond, you lend money to an entity, such as a government or corporation, which commits to repaying the principal and providing regular interest payments.
Bonds, unlike shares, do not grant ownership in the company but offer lower risk and consistent returns. The main distinction between bonds and debentures lies in the issuer and the security backing the debt. Governments typically issue bonds while companies issue debentures. Bonds are safer as compared to debentures.
Conclusion
In this blog, we understood the difference between shares and debentures. Shares and debentures are two fundamentally different investment instruments in the financial markets. Those investors who seek growth and have higher risk tolerance levels prefer to invest in shares. The ones with a lower risk tolerance level and desire for a fixed and regular income might prefer debentures.
To learn more about investing, read blogs on StockGro.
FAQs
A debenture holder is a creditor to the company. They lend money to the enterprise and earn fixed interest regardless of the company’s profitability. On the other hand, a shareholder is a part-owner of the company. They invest capital into the company and their returns (dividends) are dependent on the company’s profitability.
Debentures provide fixed interest and are debt instruments. On the other hand, preference shares offer dividend priority over common shares but still represent equity with fewer voting rights.
A debenture may involve a security charge on assets. A share charge uses the company’s shares themselves as security for debt obligations.
Yes, convertible debentures can be turned into company shares under specific conditions outlined in their issuing agreement.
The decision to invest in a share or a debenture depends on your financial goals and your tolerance for risk. If you want higher returns and have the appetite for higher risks consider investing in shares. But if you want more stable, fixed returns then consider investing in debentures.