Shares vs debentures: Types, features, and other differentiating factors

Authored by
Team Espresso
October 12 2022
|
3 min read
|
blogimage.png

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:

S.No.

Basis

Shares

Debentures

1.

Meaning

Shares are owned capital of the company.

Debentures are borrowed capital of the company.

2.

Representation

They represent owner's equity capital.

They represent debt and liabilities.

3.

Risk

Share prices are hard to predict and depend on the company’s performance.

Debentures are associated with lesser risks and promise interest payments.

4.

Interest

Returns on shares fluctuate according to the market and the company’s performance.

Debenture holders are entitled to a fixed interest irrespective of market conditions.

5.

Terminology

Investors holding shares are called shareholders.

Investors holding debentures are called debenture holders.

6.

Rights

Shareholders hold voting rights.

Debenture holders don’t have voting rights and can’t participate in annual general meetings.

7.

Trust deed

No trust deed is created when shares are issued to the public.

A trust deed is executed when debentures are issued.

8.

Repayment

In the event of winding up of the company, shareholders are paid at the very end.

Debenture holders get priority over shareholders and are thus paid off before them during the winding up of the company. 

9.

Security

Shares aren’t as secure as debentures. Rather, share price depends on market conditions.

Debentures are fixed-income securities and hence, are secured.

10.

Returns

Shareholders can enjoy high returns, but these returns are never fixed.

Debenture holders get low but fixed returns,

11.

Conversion

Shares can’t be converted to debentures.

Some debentures can be converted into shares

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.

Conclusion

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.