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?
Shares typically refer to ownership units in a company. When you own shares in a company, you essentially own a portion of that company.
When a company decides to become public, it sells these shares to investors in the stock market to raise money. When you buy shares, you become a shareholder, which means you own a part of that company.
There are two main types of shares:
- Equity shares: Equity shares are traded on the stock exchange, giving you ownership and a chance for profits if the company does well.
- Preference shares: Preference shares give you some special treatment when it comes to getting dividends or a share of the company’s profits.
Being a shareholder comes with perks. The more shares you have, the more you own the company. You might also get some money back in dividends, and you usually get a say in certain company decisions by voting.
But there are risks, too. The value of shares can go up or down, and if they go down, you could lose money. On the flip side, if the value goes up, you can sell your shares for a profit.
Shares are bought and sold on the stock market, and their prices depend on how much people want to buy or sell them. You can buy shares through a brokerage account, with a middleman helping with the process.
It’s important to remember that owning shares doesn’t mean you get to run the company. A group of individuals, called the board of directors and the company’s leaders, run the company. So, while shares can be a way to make money, they come with rewards and risks.
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. It is why, in India, if a company declares bankruptcy, debenture holders have the first claim over the company’s assets.
Categories of Debentures
Like stocks, debentures also have different types based on their characteristics.
- Convertible Debentures: Some companies give the offer to receive maturity value on debenture or get it converted to equity. This allows investors to alleviate some of the uncertainties associated with investing in unsecured bonds.
- Non-convertible Debentures: It is a traditional type of bond that pays out the maturity and accrued interest at the end of the tenure without giving any opportunities to convert to equity.
Debentures can be either floating or fixed in nature. The payout on floating rate debentures varies with the market movement. But, for fixed-rate debentures, the final payout remains assured.
It may be worth mentioning that debentures and bonds are often confused, and both are used interchangeably, but they aren’t technically the same.
How Debentures Are Different From Shares
For your better understanding, here is a table on debentures vs shares.
|Represent ownership in a company
|Represent a form of debt in a company
|Receive interest payouts
|Cannot be converted into debentures
|Convertible debentures can be converted into stocks
|Common and Preferred shareholders
|Convertible and Non-convertible Debentures
|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
|Potentially high returns
|Moderate to low returns
So, Are Stocks Better Or Debentures?
For investors, the choice between stocks and debentures boils down to risk tolerance and financial objectives. Stocks offer potential for higher returns and ownership in the company but come with higher market risks.
Debentures provide stable returns through fixed-interest payouts with lower risk. Investors seeking growth and comfortable with market fluctuations may prefer stocks, while those prioritising stable returns might lean towards debentures. A balanced portfolio, combining both, is a strategy some adopt for risk diversification.
To achieve financial growth, make strategic investment decisions. Research thoroughly to choose the best option for your goals, whether stocks or debentures. Now that you’re ready to explore these investment options, open your demat account today. Begin your investment journey with Angel One today to keep up with your financial goals.
What are shares?
Shares are units of ownership in a company. When you buy shares of a company, you become a part-owner of that company. The ownership of the company is divided into a fixed number of shares, and the shareholders own those shares. The value of shares can go up or down based on the performance of the company and the market conditions.
What are debentures?
Debentures are a type of debt instrument that companies can issue to raise funds. When you buy a debenture, you are effectively lending money to the company for a fixed period of time, and the company agrees to pay you interest on that loan. At the end of the fixed period, the company is obligated to repay the principal amount of the loan to the debenture holder.
What is the difference between debentures and shares?
While shares represent a portion of ownership in a company and entitle the shareholder to a share of the company’s profits, debentures are debt instruments that offer fixed interest income to the investor and have priority over shareholders in terms of repayment in case of bankruptcy or liquidation.
Debentures vs shares: which is better?
If you aim for long-term growth in your capital, shares can be a suitable option, but they also carry the risk of being impacted by market fluctuations. On the contrary, if you seek a fixed rate of interest payments and protection of your capital at the end of the investment term, debentures may be more appropriate.
What is something that is similar between shares and debentures?
The source of funding for the company is similar between shares and debentures.