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Difference Between Shares and Debentures

A Comprehensive Comparison Between Debentures and Shares

A common topic when discussing different investment options is whether to add stocks or bonds to a portfolio. Both shares and debentures differ in the returns they provide and their characteristics. Investors often diversify across different asset classes and include both in their portfolios to manage their risk exposure.

The choice between debentures vs shares depends on your investment objectives, stock market trading app terms and risk tolerance. Both debentures bonds and shares stocks are used by companies to raise capital in the market. However, their characteristics are very different.

Investing in equities and bonds has become prominent today as people of all ages, religions, genders and races invest their savings to get better returns. On the other hand, stocks refer to the stock capital of a company. It refers to the owner's right to a specified amount of the company's stock capital.

Debentures are debt certificates and the funds raised are considered as loans to the company. But stocks allow you to own a company. To make a sound investment decision, it is good to know both. So, before we get into the differences between stocks and bonds, let's take a closer look at each one.

Similarities Between Debentures vs Shares

Before we discuss the differences between the two, let's understand that both shares and debentures are similar in some ways:

• Both are financial assets that can be issued to the public
• Both are attractive sources of investment for investors and sources of raising money for the company
• Both can be issued at discounted rates.

Meaning and Types of Shares:

Shares are popular instruments of investment issued by a company through which some of its assets are sold to the general public and funds are thus raised. These are also known as capital, scrips or equity. As a shareholder, you own a part of the company's financial capital. It gives you the right to receive some of the company's profits. The share price is the amount you pay to buy the shares. In return, you are eligible for dividends determined by the company. The dividends will be declared at the end of the revenue year. In other words, the more you invest, the higher will be your return on the shares.

Types of shares

• Equity shares
• Preference shares

The share price depends on several factors, such as company performance, sector performance, market performance and macroeconomic parameters. Shares have high liquidity and are traded on the stock exchange.

Meaning and types of debentures:

Debentures on the other hand are debt securities that are issued by a company to raise funds in the form of public loans. It is a confirmation from the corporation that they have taken funds from you. However, a debenture cannot be considered a mortgage loan. It is covered only by the creditworthiness of the issuer, but it has some protection. For this reason, in India, when a company files for bankruptcy, bondholders have the first right to the company's assets.

There are different types of debentures such as:

Perpetual debentures have no maturity value and are treated like stocks. These bonds create a lifetime stream of income for investors and can be traded in the market like stocks.

Convertible debentures are offered by some companies that offer to retain the maturity value of the bonds or convert them into stocks. This allows investors to mitigate some of the risks of investing in unsecured debentures

Non-convertible debentures are a traditional debenture that offers no option to convert into shares. The pay-out is provided in the form of interest accrued and maturity at the end of the term period.

Registered Debentures and Bearer Debentures: Registered bonds are registered with the company and can be transferred by issuing a deed. Bearer bonds are not listed in the commercial register and can be transferred with easy delivery.

Secured and unsecured debentures: Secured debentures are a burden for the company as they allow investors to recover their principal amount or any unpaid interest from the company's pledged assets. Unsecured debentures do not come with such a commitment.

Redeemable and non-redeemable debentures: The principal amount of redeemable debentures is paid in a fixed period of time, while in non-redeemable debentures, it cannot be returned during the company's lifetime and only on liquidation.

First and second notes: First notes are those that are repaid before other debentures while second debentures are repaid after that. Notes can be either floating or fixed. When the payment varies with market movement it is called a floating note and when the final payment remains fixed, it can be called a fixed-rate note. Notes and debentures can be used interchangeably, but they are not technically the same.

Convertible and Non-Convertible Debentures: Convertible debentures can be converted into shares under predetermined conditions. Non-convertible debentures cannot be converted into shares.

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Basic Difference Between Debentures vs Shares

The following are the important points of difference between debentures vs shares:

1. Meaning:

Shares are the owned capital of the company, while debentures are borrowed funds of the company.

2. Representation:

Shares represent capital and bonds represent the company's debts and liabilities

3. Risks Involved

Many investors buy company debentures because they have lower market-related risks and promise regular interest payments as bonds do. Equities, on the other hand, not only offer predictability of the company's value and growth but also attract investors who are willing to take risks.

4. Interest earned

Therefore, the returns on shares are higher than the interest received on debentures. Interest rates remain fixed for the period of adoption. However, shares can only be affected by market risks and offer higher returns.

5. Terminology

Shareholders are called shareholders while those who own their debentures are called debenture holders. Income from shares is called dividend, but income from debentures is called interest.

6. Deductions allowed

Dividends are used for profit and are not deducted. Interest is a business expense and hence it is allowable as a deduction from the profit.

7. Security for payment

Shares are not secure and depend on market performance and fluctuations, but debentures come with security. These are like unsecured loans and are given priority if the company declares bankruptcy

8. Voting rights

Shareholders have voting rights while debenture holders do not.

9. Conversion

Shares can never be converted into debentures. Debentures can be converted into shares.

10. Risk and returns

Compared to debentures, shares come with a higher risk factor and also a higher return on investment

11. Repayment in case of maturity

Shares are repaid after all liabilities are paid. Debentures enjoy priority over shares, and hence they are repaid before shares.

12. Trust deed

No trust deed is executed in case of shares when debentures are issued to the public.