When people talk about different investment choices, among the most popular questions people have is whether they should invest in shares or debentures. However, Do you know the difference between shares and debentures? as both of them are very unique in terms of their attributes and the profits they provide.
Table of Contents
What are shares?
Stocks or shares are common investment mechanisms that are issued by corporations to enable them to offer a part of their ownership to the common public and collect money.
Owned capital is another name for shares. As a stockholder, you have a part of the firm’s financial assets. It authorities you to get some of the firm’s profits in return via dividend or other methods.
Types of Shares
- Equity shares – The stocks that are traded in the stock market are known as equity shares. Ordinary shares are another name for them. Shareholders of these stocks have voting rights as well as are eligible for dividends. They are the most commonly traded securities.
- Preference shares – These are securities that offer their owners first dibs on the company’s dividends, ahead of equity investors. The dividend rate is fixed, but unlike equity shares, these securities do not have voting rights in India. In the circumstance of a firm’s liquidation, preference shareholders gain advantage over common stockholders. Convertible preference shares are also available, which can be exchanged into common stock at a future stage.
Note:
These restrictions, nevertheless, are only applicable to preference shares issued by public enterprises or private companies with a public subsidiary. A private corporation may also grant preference shares with equal voting rights via its terms and conditions.
What are Debentures?
Debentures are long-term debt securities issued by the company to the general public. One difference between shares and debentures is that debentures become the firm’s loan money. It’s similar to a borrowing that a corporation takes out from debenture holders and promises to repay with interest when the time comes.
Individuals get rewarded in the form of interest on a frequent basis. Interest payments are distributed in contrast to the company’s earnings, but they will not be kept back if the enterprise is losing money.
Debenture holders are the firm’s creditors. Debenture holders’ capital is effectively borrowed capital for the business, which it must repay with interest on a regular basis.
This enables debenture holders to become the firm’s creditors and their position become greater than stockholders.
Types of Debentures
There are around 10 Types of Debentures:
1. Registered Debentures
A registered debenture is one that has been registered with the corporation and may be transferred using a transfer deed.
2. Bearer Debentures
Bearer debentures, on the other side, do not have a database in the firm records and can be exchanged simply by delivery.
3. Secured Debentures
Debentures with control on the firm’s assets are known as secured debentures. As a result, holders of secured debentures will recover their principal and any unpaid interest from the company’s mortgaged properties.
4. Unsecured Debentures
Debentures without control on the firm ‘s assets are known as unsecured debentures. As a result, holders of unsecured debentures cannot recover their principal and unpaid interest from the company’s mortgaged properties.
5. Redeemable Debentures
The principal value of redeemable debentures is given back over a set period of time.
6. Non-redeemable Debentures
The principal value of non-redeemable debentures is only reimbursed when the business is liquidated.
7. First Debentures
Debentures that are repaid first before any other debentures are referred to as first debentures.
8. Second Debentures
Debentures that are repaid later after all other debentures are referred to as second debentures.
9. Convertible debentures
Convertible debentures may be exchanged into securities based on predetermined details and provisions.
10. Non-convertible debentures
Debentures that are not convertible into securities are known as non-convertible debentures.
Note:
It’s important to note that debentures and bonds are often misunderstood and used synonymously, but they’re not the same thing. Now we will Look into debentures vs shares.
Difference Between Shares and Debentures(Shares vs Debentures)
| Base | Shares | Debentures |
| Nature | The firm’s equity is represented by shares. | Debentures are the firm’s borrowed funds. |
| Holder | The buyer of the stock shall be defined shareholders. | The individual who owns the Debentures is referred to as a Debenture Holder. |
| Status of Holder | Proprietors | Lenders |
| Type of return | Dividends | Interest |
| Return Income | The shareholders can receive dividends from the firm ’s profitability. | They will get interest irrespective of whether the firm has made money or not. |
| Voting rights | Yes | NO |
| convertibility | Shares cannot be converted into debentures. | Few types of debentures can be converted into shares |
| Trust Deed | Not Required | Required when issuing Debentures to public. |
| Ratings | No Rating provided by authorities | ICRA gives rating from an A to D level. |
| Security |
Not Secured | Unsecured Loans, But Repayment is Assured. |
| Risk | High Risk | Low Risk |
| liquidation |
Shares not get priority | Debentures get Priority |
Similarities Between Shares and Debentures
- Both are monetary assets.
- Both can be made available to the general public.
- The firm ‘s primary source of funding.
- They can be issued at a discounted price.
Conclusion
The nature and features of shares and debentures are quite unique. Investors should consider both in their investments to diversify their asset allocation and reduce overall risk. However, select what ideally suits you according to your own profile.
This is all from our side regarding difference between shares & debentures. Let us know your views about difference between share and debenture in the comment section.
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FAQ About the Difference Between Debentures and Shares
Types of shares and debentures?
There are two types of shares and ten types of Debentures.
How many types of shares?
There are 2 types of shares - Equity and Preference.
Types of debentures
Registered, Bearer, Secured, Unsecured, Redeemable, non-redeemable, First, Second, Convertible and Non-convertible.
Similarities between Shares and Debentures ?
The major similarities are both are assets, available for public, primary source of funding.
Types of debentures in company Law?
There are 13 Types of Debentures in company Law.
