Shares and debentures are among the most popular investments. Thus, investors should gain knowledge about both shares and debentures to make an informed investment choice. Shares are defined as the share capital of a company, whereas debentures are debt instruments that can be medium to long-term. Reputed companies make use of debentures to borrow funds and sell their equity using shares.
Between these two options, shares yield higher and better returns, while debentures carry lower risks. Both of them work under completely different concepts, and one must make a choice after weighing multiple factors such as return, ownership, repayment, quantum, conversion, security and others.
Continue reading this blog to gain detailed insights about debentures and shares, their meaning, differences and more.
Meaning of Shares
Shares are a company’s smallest portion of capital. They are usually sold by companies in the open market to raise capital. The share price is defined as the price at which the shares are currently available in the stock market.
Shares represent a significant portion of shareholders’ ownership in the company and entitle shareholders to the dividend, if there is any. They are easily transferable, and shareholders can experience capital appreciation with the expansion of the company.
What are the Different Types of Shares?
Shares are broadly classified into two different types, namely – common shares and preference shares. Let’s explore these concepts in detail below:
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Common Shares
Common shares allow you to own a part of a company. When you buy common shares, you become a shareholder, which means you are a part owner of that particular company. When common shares result in dividends being paid, the shareholders receive a portion of the company’s profits. The dividends vary in amount and are not guaranteed.
Also, common shareholders have no right to any repayment until the company manages to repay all debts to creditors, lenders and preference shareholders.
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Preference Shares
These shares give some ownership in a company but come with more benefits. Preference shareholders rank higher than common shareholders in terms of claims on assets and earnings. They usually receive dividends at fixed rates before any of the common shareholders can receive any dividends. In most cases, the interests of preference shareholders carry more priority than those of common shareholders, although they are after the interests of debenture holders.
Preference shareholders usually have no voting rights at company resolutions, unlike common shareholders, which could be a huge disadvantage for those willing to take risks. In a way, preference shareholders can earn more predictable income while they are unable to exert any influence over the management.
Debentures Meaning
Debentures are debt instruments where investors invest a certain amount and receive fixed interest payments. Investing in debentures involves lending funds to an issuing company and becoming its creditor. The company, in turn, agrees to make repayment of the principal amount with interest at a predetermined rate of interest, popularly known as coupon payments.
What are the Different Types of Debentures?
Here is a detailed overview of the different types of debentures:
- Convertible Debentures: The debentures that are convertible into equity shares of the issuing company after a particular period, thereby enabling investors to take ownership of the company, are known as convertible debentures.
- Non-convertible Debentures: These are debentures that cannot be converted into common shares and provide a fixed rate of interest at maturity.
- Fixed Rate Debentures: Fixed debentures have a fixed interest rate throughout the tenure. Here, the interest payments are constant and provide predictable returns for investors.
- Floating Rate Debentures: Floating rate debentures provide fluctuating interest rates based on a benchmark interest rate. With changes in the benchmark rate, the coupon rate applicable on a floating rates debenture also undergoes change accordingly.
- Secured Debentures: These are kinds of debentures that are backed by assets of a company pledged as collateral. If the company defaults, the debenture holders have a claim on underlying assets, thereby providing an additional layer of security for investors.
- Unsecured Debentures: Unsecured debentures are not backed by any collateral. Issuance of these debentures takes place considering the company’s creditworthiness and ability to fulfil debt obligations. Since there is no collateral, unsecured debentures provide higher rates of interest compared to secured ones to compensate for the increased risk.
- Perpetual Debentures: There is no fixed maturity for perpetual debentures, which implies there is no specific repayment tenure. The issuer pays interest for an indefinite period until the security is redeemed. However, there can be redemption options for issuers after a particular period.
- Puttable Debentures: With puttable debentures, investors can avail the option of selling back the debentures to the issuer before maturity at a specific price. This kind of feature benefits investors wanting to access their investments before the maturity date.
- Callable Debentures: With callable debentures, an issuer can avail the option of redeeming the debentures before the maturity period. If there is a fall in interest rate, callable debentures benefit the issuers as they can avail the option of calling back the debentures and reissuing new ones at a lower rate of interest.
- Zero Coupon Debentures: These debentures traditionally do not pay interest as conventional debentures do but are issued at a discount to their actual value. At maturity, investors can redeem them at their face value. The difference gives investors a fixed payment.
What are the Differences Between Shares and Debentures?
The table displays the difference between shares and debentures:
| Parameters | Shares | Debentures |
| Meaning | Securities representing portions of ownership of a company | Long-term debt instruments issued by a company |
| Nature of Capital | Owned capital | Capital is borrowed |
| Investors | Shareholders are part owners of the company | Debenture holders are well-recognised as creditors to the company |
| Returns | Returns are obtained in the form of dividends distributed out of profits and capital gains from an increase in share price | Returns are obtained in interest, and the company does not need to earn profits. Interest can be both fixed and floating |
| Liquidation | Shareholders receive the last priority | Debenture holders are paid out at the very first |
| Convertibility | Shares usually cannot be converted into debentures | Debentures can be converted into shares |
| Voting Rights | Yes, shareholders have voting rights, and investors can voice their own opinions at general meetings | Debenture holders have no voting rights |
Debentures vs Shares – Which One to Choose?
To choose between shares and debentures and to decide which one is a better investment, you should consider various factors such as investment goals, risk appetite and underlying market conditions. Shares provide higher returns through capital appreciation and dividends but carry greater risks and volatility. Debentures, on the other hand, provide stability but come with a low potential for capital growth.
If an individual investor looks for growth and is eager to undertake market risks, investing in shares will be a viable option. However, if an individual has a low-risk appetite and prefers income stability, debentures will be an ideal choice. Diversification should be brought about to maintain a balance between risk and return through investment in both shares and debentures.
