A common topic that often comes up when we discuss various investment options is whether shares or debentures, which one to include in our portfolio. Well, both are very different in their characteristics and the returns they offer. Often investors include both in their portfolios to diversity with different asset classes and manage risk exposure.
Whether you will pick stocks or debentures depends on your investment goals, market condition, and abilities to take risks. Debentures and shares are both used by a company to raise capital funds from the market. But they are very different in their characteristics.
A debenture is a debt tool – the funds raised are considered loans to the company. But shares allow you ownership in the company. It’ll be good to know both to make a sensible investment choice. So, before moving into the discussion of differences between shares and debentures, let’s learn about each in detail.
What Are Stocks/Shares?
Stocks or shares are popular investment tools, issued by corporate entities through which they sell a portion of their proprietorship to general investors and raise funds through it. These are also known as scrips or owned capital. As an owner of stocks, you are holding a part of the company’s financial capital. It entitles you to receive a portion of the company’s profit in return.
Types of stocks are,
The price that you pay to buy shares is called share price. In return, you qualify to receive dividends as decided by the company. Profit is announced during the end of a financial year, which means, the longer you stay invested, the higher will be your gain from the share.
Share prices depend on various factors, including market performance, macroeconomic parameters, sectoral performance, and individual company performance. As investment instruments, share are highly liquid and traded in the exchanges.
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 intrinsic characters.
- Perpetual Debentures: Perpetual debentures don’t have a maturity value and treated much like equities. These bonds create a lifelong stream of income for the investors, and they can trade those the market like equities.
- Convertible Debentures: Some corporate 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 debenture varies with the market movement. But, for fixed-rate debentures, final payout remains assured.
It may worth mentioning that debentures and bonds are often confused, and both are used interchangeably, but they aren’t technically same.
How Debentures Are Different From Shares
This article will be your ready reckoner to understand the differences between shares and debentures.
For your better understanding, here is a table on debentures vs shares.
|Nature||Shares are ownership capital, issued by a company to the public||Debentures are a debt instrument, issued to raise loans from the market|
|Holder||The owner of the share is called shareholder||The owner is called debenture holder|
|Return policy||Receive dividend announced by the company||Based on fixed or floating interest rates, a return is paid on maturity|
|Rating||No rating is given. Investors guess share performance based on historical and current data received from different financial charts||Rated by ICRA on a scale of A to D. Companies with AAA rating are considered the safest|
|Status||Shareholders enjoy ownership status in the company||Treated as lenders|
|Security||Not secured. Depends on market fluctuation and performance||Unsecured loans, but repayment is assured. Get attached to the company’s assets if the company declares bankruptcy|
|Conversions||Can’t convert equities into debentures||Can be converted easily to equities|
|Risk||High risk||Secured investment|
|Voting rights||Shareholders have voting rights in the company||Debenture holders don’t have any rights to vote|
So, Are Stocks Better Or Debentures?
Investment decision should depend on your personality as an investor. As investment opportunities, both shares and debentures have unique sets of advantages and disadvantages. Corporate uses both to raise funds from the market.
Stocks are considered a high-risk investment but also offer a higher return to investors. Comparatively, debentures are low in risks category and offer assured returns. You can include both in your portfolio for diversification and lowering risk exposure.