Shares vs Debentures: Types, features, and other differentiating factors
Entering the investment world is a daunting task, made tougher by the sheer jargon. Seeing as you are new to this world, it makes sense that you begin by understanding what shares and debentures are and what the difference is between shares and debentures. Continue reading to know more about these terms.
What are Shares?
Shares are units of equity ownership of a company. They form the smallest division of a company's capital. Equity shares are issued by companies to the general public or private organizations, who are then called shareholders. The holders of equity shares are part owners of the company and are entitled to a share in the company's profits in the form of dividends.
Shares of a public limited company are traded on the stock exchanges. The share price is the amount paid by the investors to buy the shares, which in turn, depends on factors such as the company's financial performance, demand and supply for the shares, sectoral activity, and market performance, among others.
Shares are broadly divided into two categories - equity shares and preference shares. Shareholders may have different powers based on the specification and types of shares they hold.
There are two types of shares:
1. Equity shares: These shares are issued to the general public and give them the right to vote in the company’s general meeting, share’s company’s profits, and claim assets of the company.
2. Preference shares: These shares prioritize a set of investors – these investors are paid dividends before other shareholders. This means preferential shareholders are given preferential rights.
What are Debentures?
While shares are equity instruments, debentures are debt instruments. They are debt securities issued by companies and governments to the public. Like a loan, this debt instrument also pays periodic interest payments.
However, unlike a loan, debentures are not backed by collateral; rather, investors rely solely on the issuer’s creditworthiness.
There are several types of debentures:
1. Perpetual debentures
2. Convertible and non-convertible debentures
3. Registered and bearer debentures
4. Secured and unsecured debentures
5. Redeemable and non-redeemable debentures
Shares vs Debentures
Now that we have a basic understanding of what shares and debentures are, let’s understand the difference between shares and debentures:
Similarities between shares and debentures
While there were numerous differences between equity and debentures, they do have some similarities, such as:
1. Both shares and debentures are assets issued to the public by companies.
2. They are good options for investment and raising capital.
3. Both may be issued at discounted prices.
Shares and debentures are great investment options depending on your investment objectives. Both shares and debentures offer different returns based on their offer and features. An investor must choose between shares and debentures based on several factors like capital, risk, market conditions, and other factors.