A common topic that often comes up when discussing various investment options is whether shares or debentures should be included in our portfolio. Both are very different in their characteristics and the returns they offer. Often, investors include both in their portfolios to diversify with different asset classes and manage risk exposure.
Whether you pick stocks or debentures, both instruments are used by the company to raise capital from the market. But they are very different in their characteristics for investors.
In this article, we will understand shares and debentures in detail and learn about their differences from the investor perspective.
What Are Stocks/Shares?
Stocks or shares represent ownership in a company. When you buy shares, you become a part-owner or shareholder of that company. Companies issue shares to raise funds from the public through the stock market.
Shareholders may earn returns through price appreciation or dividends. Holding more shares means a larger ownership stake and voting rights on certain company matters. While shareholders own part of the company, they don’t control its day-to-day operations. Decisions are made by the board of directors and management.
However, investing in shares comes with risks. Share prices fluctuate based on market demand, company performance, and other economic factors. Shares are traded on stock exchanges like NSE and BSE in India. There are various types of shares, each tailored to different investor or company needs.
What Are Debentures?
Debentures are debt tools issued by companies to raise funds as loans from the public. It is an acknowledgement from a corporate entity that it has taken a loan from you. However, a debenture isn’t a secured loan. It is backed solely by the creditworthiness of the issuing firm. But it carries some amount of assurance.
In India, if a company declares bankruptcy, debenture holders have the first claim over the company’s assets. You can buy debentures in India through stock exchanges using a demat account, during public issues of Non-Convertible Debentures (NCDs), or via SEBI-registered platforms.
Banks, NBFCs, and wealth advisors also offer them. Always check credit ratings and terms before investing. Discover the different types of debentures to understand which suits your investment needs.
How Debentures Are Different From Shares?
| Basis | Shares | Debentures |
| Definition | Represent ownership in a company | Represent a form of debt in a company |
| Returns | Receive dividends | Receive interest payouts |
| Voting Rights | Yes | No |
| Convertibility | Cannot be converted into debentures | Convertible debentures can be converted into stocks |
| Types | Common and Preferred shareholders | Convertible and Non-convertible Debentures |
| Representatives | Part-owners of the company | Creditors to the company |
| Risk of Investment | High market risks due to volatility | Lower risks due to lower exposure to market volatility |
| Returns Level | Potentially high returns | Moderate to low returns |
Conclusion
Understanding the difference between shares and debentures is essential before making any investment decision. Both can play an important role in building a well-balanced investment portfolio.
If you’re aiming for long-term growth, shares may be more suitable. If your priority is stable income with lower risk, debentures might be a better choice. Carefully evaluate your financial goals before choosing between shares and debentures.
FAQs
What are debentures?
Debentures are long-term debt instruments issued by companies to raise funds. Investors lend money to the company and, in return, receive interest at a fixed rate. Unlike shares, debentures do not offer ownership but promise repayment at maturity.
What are stocks?
Stocks represent partial ownership in a company. When you buy stocks, you become a shareholder and can benefit from its growth through dividends and capital gains. Stock prices fluctuate based on company performance, market trends, and investor sentiment.
What is the difference between debentures and shares?
Shares represent ownership in a company, while debentures are loans given to the company. Shareholders may earn dividends and can vote in company matters; debenture holders earn fixed interest but have no ownership or voting rights.
Debentures vs shares: which is better?
Shares tend to offer higher returns and ownership benefits but come with greater risk. Debentures provide stable, fixed income with lower risk. The better option depends on your risk appetite and investment goals.
What is something that is similar between shares and debentures?
Both are financial instruments issued by companies to raise capital. They are tradable in the market and can be held by investors to earn returns, either through dividends or through interest.
