Go Through Difference Between Shares and Debentures and Pick the Right Security to Invest!
When one starts finding the best way to invest, then a plethora of options starts circulating before the eyes. However, the top dominants of the investment market are shares & debentures. People from all races & ages invest their precious money in these options for better returns. The point to underline here is, people are well acquainted with words shares & debentures, but unfortunately, they are unaware of the difference between shares and debentures.
If you too, want to distinguish between shares and debentures, then you will get all the info here! Before that, know what both of these actually mean!
Meaning of Shares
Shares are the smallest unit of a firm’s capital. These are sold in the stock market. The price of one share at which an investor purchases it is called share price. The shareholders are pronounced as the owners of the company, and they get a dividend from the shares invested.
Meaning of Debentures
Debentures are borrowed capital & a debt tool, which supports the long term debts of the company. The debenture holder is known as the creditor of the company. The debentures carry a fixed rate of interest. Its sustainability depends upon the issuer’s credibility, and these are an unsecured source of finance.
Difference Between Shares and Debentures
Debentures and shares difference is given below:
With rising share capital, a shareholder gets the part of the company’s ownership. With the rising number of debentures, the debenture holder will not get the part in ownership.
Debenture holders get a fixed rate of interest even if the company has not earned profits. However, shareholders can get dividends only if the company has earned profits. Otherwise, they don’t get it.
This is another big difference between shares and debentures. Most of the investors invest their money in debentures with the precision of lesser market-driven risks that it carries. Besides the less risk, it promises for fixed returns as well. However, shares are purchased by the investors who are ready to take the market risk associated with it.
As you know, the common business rule, with more risk, you get more profits. The same happens with shares as well. With higher market risk, the investor is supposed to get the increased value of shares & higher returns. Shares can make you eligible for more profits contrasting to fixed returns in case of debentures.
One another difference between equity shares and debentures depends upon its role. The debenture holders get the title of creditors of the company, and they play this role for a fixed tenure, after which the company has to pay the whole amount. Shareholders get the role of owners of the company.
Conversion of debenture is possible into shares. However, share can’t ever be converted into debentures.
While the issue of debentures, trust deeds are executed by the company with the concerned parties. But on shares issuance, no trust deed is executed.
The difference between shares and debentures also depends upon their capability to transfer. Debentures can be transferred freely anytime. But this can’t happen with shares. These are non-transferable and non-divisible.
Winding Up of the Company
In the case of the company’s winding up, the debenture holders get their entire money back on the preference. However, in the case of shares, only the preference shareholders get a preference of over equity shareholders in terms of payment of the capital amount.
These are basic debentures and share difference grounds. While going through all the differences between share and debentures, it is clear that both have their own plus and minus points. The need is to do deep research on both the securities.
One underlined point is, instead of just looking at risk factors based on your own constraints, try to look at returns, financial growth, and capacity. This would clear you the major difference between shares and debentures.
Hopefully, you have got a clear insight into the exact difference between shares and debentures, so choose the security to invest wisely now!