Difference Between Shares and Debentures

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.

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 the Different Types of Shares?

• Common Shares (Also Ordinary Shares):

The most basic and widespread type. They grant voting rights on company decisions and share in profits (dividends) but after preference shareholders.

• Preference Shares:

Offer a fixed dividend payout before common shareholders. They may also have priority if the company liquidates. Often lack voting rights.

• Non-Voting Shares:

A type of common or preference share that excludes voting rights. These might be issued to employees as compensation or to raise capital without diluting voting control.

• Dual Class Shares:

Companies can issue shares with different voting rights. This allows founders or controlling parties to maintain control despite owning less than half the company.

• Redeemable Shares:

The company has the option to buy back these shares at a predetermined price on a specific date or under certain conditions.

• Cumulative Preference Shares:

Guarantee missed dividends (arrears) are paid to holders before current dividends are distributed to common shareholders.

• Restricted Stock Units (RSUs):

A form of employee compensation. These are company shares granted to employees that vest over time, meaning they become the employee’s property after meeting specific conditions.

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.

Types 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.
• Secured Debentures: Backed by specific assets of the company, these debentures offer a higher level of security for investors in case of default. If the company fails to repay, the assets can be sold to recover the investment.
• Unsecured Debentures: These debentures are not backed by any specific assets, relying solely on the company’s creditworthiness. They typically offer higher interest rates to compensate for the increased risk.
• Fixed Rate Debentures: These debentures offer a constant interest rate throughout the investment period, providing predictable income for investors.
• Floating Rate Debentures: The interest rate on these debentures fluctuates based on a benchmark rate, such as a government bond yield. They offer protection against rising interest rates but may have lower returns in stable market conditions.
• Perpetual Debentures: Also known as irredeemable debentures, these have no set maturity date. The company can choose to redeem them after a long period or not at all, but must continue paying interest indefinitely.
• Callable Debentures: The company has the right to repurchase these debentures before maturity, typically under specific conditions like falling interest rates. This allows them to potentially save on interest costs.
• Puttable Debentures: These debentures grant investors the right to sell them back to the company before maturity at a predetermined price. This offers protection against falling interest rates or a potential company default.
• Zero Coupon Debentures: These debentures are issued at a discount to their face value and don’t pay periodic interest. The investor’s return comes from the difference between the purchase price and the face value redeemed at maturity.

How Debentures Are Different From Shares?

For your better understanding, here is a table on debentures vs shares.

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. 

Conclusion

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.

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