Understanding the key differences between shares and debentures

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. 

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