Difference Between Shares and Debentures – 9 Factors You Should Know Before Investing!

Shares vs Debentures

Be it any business, it needs funds to grow. There’s a lot of ways one can raise funds for the business. But shares and debentures are some of the best practices.

Although they serve a similar purpose, there are certain differences between shares and debentures that will be covered in this article.

So, without wasting any time, let’s dive into the topic!

Content:

What are Shares?

Shares are the smallest unit of any company’s capital. They are basically small financial assets offered in the stock market in order to raise capital for a company. When you buy shares of a company, you become the owner of that company proportional to the value of shares. Also, you will get the benefits of voting, bonus shares, and dividends.

Types of Shares

Shares are basically of two types:

  • Equity Shares
  • Preference Shares

Click here to know more about the types of shares and the difference between equity share and preference share.

Shares look logical, isn’t it? You invest some amount into the company and take your share in the profits while being called as the part-owner of the company.

Wait until you hear the complete story, now let’s get a brief idea about debentures as well.

What are Debentures?

Debentures are the borrowed capital or debt instruments of the company. They are generally a long-term debt or unsecured loan that a company has taken from the public, which needs to be paid back with interest in due time.

If you invest in debentures, you will receive a timely interest payment on your investment irrespective of the company’s profit or loss.

Types of Debentures

Debentures can be classified based on a lot of factors, mentioning a few important ones:

  • Secured Debentures
  • Unsecured Debentures
  • Convertible Debenture
  • Non-Convertible Debentures
  • Registered Debentures
  • Bearer Debentures

Suddenly, debentures started looking like a better option, isn’t it?

I agree both shares and debentures are good in their own ways. The next section of this article will help you decide which is better among the two. 

Debentures vs Shares

The below table represents the difference between shares and debentures: 

Factors Debentures Shares 
MeaningDebentures are the borrowed capital for the company. It represents the debts of the company.Shares are the smallest unit of any company’s capital, representing the ownership of the company.
Return on InvestmentsIn form of InterestIn form of Dividends
Investor Representation Creditors Part owners
Voting RightsNoYes
Risks Low High 
Convertibility Can be converted into sharesCannot be converted into debentures
RatingRated by ICRA, from safest to vulnerableNo rating is given.
Security Combination of secured and unsecured loans, but the returns are assured.Combination of secured and unsecured loans, but the returns are assured. 
Repayment They are prioritized before shares in repayment.Shares are the last ones to be repaid after all the liabilities are paid.

Quick Summary

  • There’s a lot of ways one can raise funds for their business. But shares and debentures are some of the best practices. Although they serve a similar purpose, there are some differences between shares and debentures.
  • Shares are the smallest unit of any company’s capital. Shares are issued in the stock market in order to raise capital.
  • Shareholders get the benefits of voting, bonus shares, and dividends on the shares they have invested in.
  • Shares are basically of two types:
    • Equity Shares
    • Preference Shares
  • Debentures are the borrowed capital or debt instruments of the company. They are generally a long-term debt or unsecured loan that a company has taken, which needs to be paid back with interest in due time.
  • If you invest in Debentures, you will receive a timely interest payment on your investment irrespective of the company’s profit or loss.
  • Debentures can be classified based on a lot of factors, mentioning a few important ones:
    • Secured Debentures
    • Unsecured Debentures
    • Convertible Debenture
    • Non-Convertible Debentures
    • Registered Debentures
    • Bearer Debentures

FAQ(Frequently Asked Questions)

1. Are Debentures Less Riskier Than Shares?

Debentures are the borrowed capital and are a form of unsecured loan that a company has taken from the public. Technically they are prioritized over shares during liquidation of the company, making debentures less riskier than the shares.

2. What Are The Advantages Of Debentures?

  • You get timely interest payments
  • They are prioritized before shares in repayment
  • Can be converted into shares
  • Rated by ICRA, from safest to vulnerable
  • Combination of secured and unsecured loans, but the returns are assured
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Vinayak Hagargi

Vinayak is Impressively Enthusiastic about Financial Markets, Research & Curating Layman-Friendly Content. He has been Successfully Contributing to the Financial Markets for over 2 years & has written over 100+ articles. He aims to continue sharing his knowledge to empower newbies with Relatable, & Easy to Understand Content.

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