Difference Between Shares and Debentures

Companies require funds to initiate new ventures, expand their operations, buy assets, or cover their daily expenses. One common way companies raise money is by issuing securities to investors. Shares and debentures are two forms of securities issued by companies.

While shares and debentures allow companies to generate capital, there are key differences between the two. When an individual buys shares of a company, they become a part owner of the company, but when an individual purchases debentures of a company, they become the creditor of the company.

Shares and debentures differ on several counts, such as returns, risk, voting rights, repayment, and many others.

This article gives an understanding of the difference between shares and debentures. It is important for anyone who wants to learn about investing or the financial structure of a company.

Key Takeaways

• Shares represent ownership in a company, while debentures represent a loan given to the company.
• Shareholders may earn dividends and capital gains, whereas debenture holders generally receive fixed interest.
• Shares usually involve higher risk because their market value can fluctuate, while debentures generally offer more predictable returns.
• Ordinary shareholders usually have voting rights, but debenture holders generally do not have voting rights.
• In case of liquidation, debenture holders generally have a higher claim on company assets than ordinary shareholders.

What are the Shares?

A share is a representation of ownership in a company. When the company requires funds, it divides ownership into small parts called shares and offers them to investors. An individual who buys such shares becomes a shareholder.

Assume that a company has 1 lakh shares and you have 1,000 shares of them. So, you own a certain proportion of the company. The extent of your ownership depends on how many shares you own relative to the total number of shares of the company.

Sometimes, shareholders earn from their investments through dividends, but dividends are not always paid. Usually, when the company earns enough profit and the management wants to distribute a portion of the profit among the shareholders, dividends are paid.

The value of a share can also rise. Suppose you bought a share at ₹100 and sold it at ₹150. You earned ₹50 per share. But the price can also go down, resulting in losses for the shareholders.

Also Read About: What is Share?

What are Debentures?

Debentures represent borrowed funds. Issuing debentures means borrowing money from individuals. Individuals who invest in debentures are referred to as debenture holders.

Debenture holders do not become part owners of the company like shareholders, but rather they become creditors. The company agrees to pay interest on the money borrowed and repay the borrowed amount within the stipulated period of time.

If you invest ₹10,000 in a debenture at an interest rate of 8%, the company may pay you ₹800 annually in interest payments, depending on the terms of the issuance.

The income from a debenture is predictable since it usually has a fixed interest rate. However, the security of a debenture depends on the financial stability of the issuing company.

Difference Between Shares and Debentures

Basis	Shares	Debentures
Meaning	Shares signify ownership in a company.	Debentures signify a loan advanced to a company.
Investor	The investor is referred to as a shareholder.	The investor is called a debenture holder.
Types	Equity shares and preference shares.	Secured, unsecured, convertible, and non-convertible debentures.
Position	Shareholders are part-owners of the company.	Debenture holders are creditors of the company.
Return	Returns come mostly in the form of dividends and capital gains.	Returns come mostly in the form of interest.
Rate of Return	Dividends are not fixed and can change depending on the profit made.	Interest is mostly fixed based on the terms of debenture.
Risk	Involves more risk since the price of shares is volatile.	Involves less risk compared to ordinary shares, but not without any.
Repayment	The shares will not be repaid during the business lifetime.	The debentures will be repaid after a certain period or maturity.
Security	The shares are not normally secured against company assets.	The debentures can either be secured or unsecured depending on the terms of the debenture.
Control	The shareholders can exercise some degree of control in the company through voting rights.	The debenture holders do not exercise any control over company management.
Claim on Assets	The shareholders will have a residual claim on the assets of the company.	The debenture holders will have a prior claim over the ordinary shareholders depending on the terms of the debenture.
Nature of Capital	The shares represent the ownership equity capital of the company.	The debentures represent the borrowed debt capital of the company.

Which is Better: Shares or Debentures?

There is no single answer to this question, since everything depends on the investor's financial goals and risk tolerance.

An investor who wants to become a part-owner of the company and is ready to take greater risks may prioritize shares. The shares can give good profit in the long run, but there is also the risk that prices may drop sharply.

An investor who prefers a more predictable income and is more focused on receiving interest and repayment of capital may consider debentures. Investors must examine the company's financial position and the terms of the debenture before investing.

In other words, shares are better for persons interested in ownership and growth, while debentures are better for those interested in predictable profit.

Also Read About: What are Equity Shares?

Conclusion

Shares and debentures are some of the major forms of financing for companies, but they have different roles to play for investors. An investor buys shares to become an owner of the company, while they purchase debentures to lend money to the company. The shareholders will get dividends and appreciation in price when they opt for shares, but they will be exposed to higher risks. The debenture holder will earn interest and have a claim on the repayment of the debentures.

Also Read About: Convertible vs Non-Convertible Debentures