Shares vs. Debentures: Important differences To Know

In the world of investment, it is crucial to understand a few basic concepts like Shares vs. Debentures. Each of these represent a mode of investment in any company. But there are some major differences between the two. In order to make the right investment decision, it is pivotal for you to understand the meaning of both.

This blog will help you in grasping the key concept i.e. Shares vs. Debentures. Be assured that once you are through it you will never make the wrong choice. So, without any wait, let’s get started.

What are Shares & Debentures?

There are many different kinds of companies, government bodies and legal entities in the economy. In order to fulfill their needs they take from society. One of the things they take is MONEY. Don’t worry it is not “money donated” but by way of investment.

You might have heard of IPOs, stock markets etc, this is the medium by which a normal person known as the investor invests in a company. In order to understand this whole process of investment, you must start by learning the meaning of Shares & Debentures.

Shares

These are the instruments by which a person becomes a part owner of the company as a shareholder. Shares are defined as the smallest unit of a company’s capital structure. In order to buy these shares, you can either apply whenever an IPO comes or make a demat account and start investing.

As a Stakeholder you have certain rights and benefits. Shares are characterized into 2 main types: 

1. Equity

These are the normal shares that you can buy from any Stock Exchange. You also get a dividend i.e. extra profits on them but the rate is not fixed. These shares are also irredeemable.

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2. Preference-

As the name indicates, they provide extra benefits to the holder. These benefits are in the form of voting rights in company meetings and first hand over dividend distribution. In case the company gets liquidated the holder gets initial preference as well.

Some of the recent IPOs wherein shares were issued/ will be issued  to investors are:

  1. Slone Infosystems- (upcoming)
  2. Winsol Engineers Ltd- (upcoming)
  3. Bharti Hexacom – 12th April 2024
  4. Creative Graphics Solution- 9th April 2024

Debentures

Debentures basically entail borrowed capital. Equity on the other hand means owned capital. It is a long term financial instrument by which a company raises capital. It is in the form of a loan. Investors provide loan to the company and company returns the amount with a premium i.e. Interest.

Whoever gives the loan is titled as the “Credit Holder” by the company. He is given more preference than a shareholder. So, does it mean Debentures are better? What happens if the company liquidates? Who will be given higher preference?

Here are the answers: If a company liquidates then Debentures Holders are given more preference then afterwards the Shareholders. 

Debentures are also categorized into 2 types:

1. Secured & Unsecured-  

Debentures for which a charge is created on company assets are known as Secured. It means they can sell the assets to recover the amount from the company. Those who can’t are Unsecured.

2. Redeemable & Irredeemable- 

Wherein the period of repayment is fixed, we call them Redeemable Debentures and others are Irredeemable

    There are some categories like Convertible, Registers and bearer but mostly they are not chosen as preferred mode.

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    Some of the Companies that have issued Debentures are:

    1. Neotrex Steel Private Limited – Unsecured Bonds
    2. Anand Rathi Global Finance Limited – Secured Bonds
    3. Poonawalla Fincorp Limited – Unsecured Bonds 

    Shares vs. Debentures: Tabular Comparison

    The best way to compare Shares and Debentures is by considering Rights, Risks, Obligations and Returns associated with both.

    Here is a table showing a comparison between Shares and Debentures.

    BasisShares Debentures
    RightsProvide Voting Rights No Voting Rights 
    RiskRiskiest Owners,Less Risky and Secured 
    ObligationNot Obliged Have Obligation over the favored assets
    Returns In form of dividend out of profits Interest (fixed or floating) which is paid irrespective of profits or losses.

    Shares vs. Debentures: Which is better?

    Here comes the most important decision: Shares vs. Debentures, which is better? By comparing both it is evident that both are excellent financial instruments that properly cater the capital raising needs of the company. Both have different functions and benefits and are suitable in a certain situation.

    As an investor your main goal should be to understand which one will benefit you most and at what time. If you can figure it out then you can easily make the right choice and maximize your returns.

    What will you choose- shares or debentures? Do comments down below and feel free to ask your queries.

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