August 11, 2023

Difference Between Shares and Debentures

Difference Between Shares and Debentures

The main difference between shares and debentures is that acquiring shares implies you’re an owner, or shareholder, in the company, reflecting an equity stake. In contrast, when you buy debentures, you essentially lend money to the company, becoming a creditor, representing a form of debt.

Contents:

What are Shares?

Shares are pieces of a company’s ownership that give the owner a claim to some of the company’s earnings and assets. As a shareholder, a person has the right to vote on important company decisions and to receive dividends, which are regular payments of a portion of the company’s profits.

What are Debentures?

Debentures are long-term financial instruments companies issue to raise capital from the public. They are a type of debt that the company is legally required to pay back at a certain date in the future, with a fixed interest rate.

Unlike shareholders, people who own debentures do not own any part of the company. Instead, they are creditors who have a promise from the company, in the form of a debenture, that the money they lent will be paid back with interest.  Before any dividends are given to shareholders, this interest on debenture is paid on a regular basis.

Debentures can also be secured or not secured. Secured debentures are debts that are backed by certain assets of the company. This protects the people who own the debentures. On the other hand, unsecured debentures don’t have any collateral, so the interest rate is higher to make up for the higher risk.

Distinguish Between Shares and Debentures

The primary difference between shares and debentures is shares represent equity, meaning when you purchase shares, you acquire a portion of ownership in the company. On the other hand, debentures signify debt, meaning if you buy debentures, you essentially lend money to the company, expecting it to be repaid with interest.

Here’s a comprehensive comparison between shares and debentures:

ParameterSharesDebentures
NatureIndicate shareholding in a corporation Indicating an obligation to the corporation
ReturnsDividends and capital gains generate returns from shares. Returns from debentures are in the form of fixed interest rates. 
RiskShares are more risky because their returns depend on the company’s performance. Debentures are less risky than stocks because they pay fixed interest payments regardless of the company’s profits or performance.  
RightsShareholders have voting rights, allowing them to participate in company decisions.  Debenture holders have no voting rights.  They are the company’s creditors, whose primary goal is to receive fixed interest payments. 
Claim on income/assetsShareholders have a residual claim on the company’s income and assets. This means that they are paid only after all debts and other obligations have been satisfied.  Debenture holders have a first claim to the company’s earnings and assets.  In the event of bankruptcy or liquidation, they are paid before shareholders.  
ConversionShares cannot be converted into debentures.Some debentures have the option of being converted into shares. This allows debenture holders to convert their debt holdings into equity shares.

We hope that you are clear about the topic. But there is more to learn and explore when it comes to the stock market, and hence we bring you the important topics and areas that you should know:

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Difference Between Shares And Debentures  – Quick Summary

  • The main difference between shares and debentures is when you purchase shares, you become a shareholder and part-owner, holding an equity stake in the company. However, when you invest in debentures, you are essentially a lender or creditor to the company, indicating a debt obligation the company must repay. 
  • Shares are ownership units in a company, conferring voting rights and claims on profits. Example: Purchasing Reliance Industries Ltd shares.
  • Debentures are borrowings by a company that promises to pay back with fixed interest but gives no ownership rights. Example: Buying debentures of Tata Motors.
  • In comparison, shares and debentures differ in nature, returns, risk levels, rights granted, and conversion possibilities. Example: Rights and returns of a shareholder vs a debenture holder in HDFC Ltd.
  • Invest and grow your wealth at low brokerage rates and user-friendly platform of Alice blue.

Distinguish Between Shares and Debentures – FAQs

1. What Is the Difference Between Shares and Debentures?

The primary distinction between shares and debentures is that shares are ownership units in a company, granting shareholders a claim on profits and voting rights. In contrast, debentures are long-term financial instruments representing a company’s debt obligation, providing debenture holders with periodic fixed-interest payments but no voting rights. 

2. Are Debentures Better Than Shares? 

Debentures offer a fixed income and are less risky, so they are good for investors who want to keep their money safe. On the other hand, shares have the potential for higher returns, but they also carry more risk, so they are best for more risk-taking investors.

3. Which Is More Risky Debentures Or Shares? 

Most of the time, shares are riskier than debentures. This is because the returns on shares (dividends and capital gains) depend on how well the company does, while interest payments on debentures are fixed no matter how well the company does.

4. Can A Debenture Be Converted Into Share? 

Yes, certain types of debentures, called convertible debentures, can be converted into shares of the company that issued them after a certain amount of time.

5. What Is An Example Of A Debenture? 

Tata Motors has 10-year debentures with a fixed interest rate, an example of a debenture. Investors who buy these debentures will get the fixed interest rate on a regular basis until the debenture matures, at which point they will get the principal amount back.

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