If you are a beginner in the stock market, you must be curious to know the ways to invest in companies. Shares and debentures are two routes. But do you know what they mean and how they differ from each other? These are two common methods for companies to raise funds from the public, but there is a huge difference between shares and debentures. In this blog, we will explain the key differences between shares and debentures and help you understand their respective features, types, and more.
Shares Meaning
Shares are defined as the units of ownership in a company.
This means that a ‘share’ that you buy (given to you in the form of a share certificate) represents your ownership in a particular company.
When a company issues shares, it is offering a part of its share capital to the investors, who then become shareholders or owners of the company.
1. Ownership: When you buy a share, you’re buying a tiny piece of a company. If a company has 1,000 shares and you own 100 of them, you own 10% of the company.
2. Dividends: As a shareholder, you may be entitled to receive dividends, which are payments made by the company to its shareholders from its profits.
3. Voting Rights: Depending on the type of shares you have, you might get to vote on big decisions the company makes.
4. Capital Appreciation: The value of your shares can go up or down over time. If the company does well and becomes more valuable, the value of your shares goes up, too. That means you could sell them for more money later on.
Best Way to Understand Shares Meaning in the Stock Market Trading:
imagine you start a pizza joint with a friend.
You both put in money to get things going.
Now, to keep it fair, you decide to split the ownership into shares.
Each share is like a slice of the pizza (or the business, in this case). The more shares you have, the bigger piece of the business you own.
In the stock market, companies like Infosys or Tata Motors are like these pizza joints. They’re divided into millions of slices (shares).
When you buy shares of a company, you’re basically buying a piece of that business. If the business does well, your share’s value might go up. If it doesn’t, well, you might have a less valuable slice.
So, owning shares means you’re a part-owner of a company. It’s like being a mini-boss in the pizza business!
Debentures Meaning
It represents a type of debt instrument issued by corporations or governments to raise capital. When a company issues debentures, it means that it is borrowing money from investors with a promise to repay the principal amount along with interest at a specified future date.
- It is a document that acts as proof of debt and contains the terms and conditions of the loan, such as the amount, the interest rate, the maturity date, the security, if any, and the rights and obligations of the issuer and the holder.
- Debentures are a form of long-term financing for a company that needs funds for expansion, diversification, or modernisation.
Debentures are advantageous for a company as they do not dilute the ownership or control of the company, they have lower interest rates than other forms of borrowing, and they are tax-deductible expenses.
Understand the Concept of Debentures
Imagine you want to expand your pizza place, but you need more cash.
You can’t call up your partner because he’s broke after investing in the joint.
So, you decide to borrow money from someone else.
This is where debentures come in. You will borrow money from someone willing to invest in your pizza business with a promise to pay him back at a future date with interest.
Companies like Reliance, HDFC, Tata, or even government organisations may issue debentures to raise funds.
When you buy a debenture, you’re basically lending money to the company.
In return, the company promises to pay you back with some interest after a certain period.
It’s like giving a loan to your pizza business, and in return, you promise to pay them back with extra cheese (interest) on top.
So, in a nutshell, shares make you a part-owner of a company, while debentures make you a temporary lender.
Remember, the stock market is like a giant pizza party, and companies like Infosys, Tata Motors, Reliance, and HDFC are just some of the places where you can get a slice or lend them some dough!
Difference between Shares and Debentures in the Indian Stock Market
| Basis | Shares | Debentures |
| Nature of Capital | Company-owned capital | Borrowed capital of the company |
| Holder | Shareholder | Debenture holder |
| Ownership Status | Shareholders are owners of the company | Debenture holders are creditors |
| Representation of Capital | Represents a part of the company’s capital | Represents a loan to the company |
| Voting Rights | Shareholders have voting rights | Debenture holders do not have voting rights |
| Dividends | The company pays dividends to shareholders | The company pays interest to debenture holders |
| Dividend Source | Dividends paid only out of profits | Interest can be paid even if there is no profit |
| Tax Deductibility | Dividends are not allowed as a deduction from profit | Interest is allowed as a deduction from profit |
| Convertibility | Not convertible into debentures | Can be convertible into shares |
| Repayment in Winding Up | Repaid after paying off liabilities in winding up | Repaid before shares in winding up |
| Charge on Assets | Does not carry any charge on the assets | May carry a charge on the assets |
| Trust Deed Requirement | No trust deed is executed | A trust deed must be executed |
Key Differences between Shares and Debentures
• Shares represent the capital of the company, while debentures represent the debt of the company.
• Shareholders are the owners of the company, while debenture holders are the lenders of the company.
• Shareholders have voting rights and can influence the management and decisions of the company, while debenture holders do not have any such rights or powers.
• Shareholders receive dividends as a share of the profits of the company, while debenture holders receive interest as a fixed return on their investment.
• Shareholders bear the risk of loss if the company performs poorly, while debenture holders have a fixed and assured return regardless of the company’s performance.
• Shares have high liquidity as they can be bought and sold easily on the stock market, while debentures have low liquidity as they are usually long-term and not easily transferable.
Debentures vs Shares: Types
Here are a few types of shares and debentures that you must know:
Types of Debentures
• Secured debentures: These debentures have some assets of the company as a guarantee. If the company fails to pay back the money, the investors can sell the assets and get their money back.
• Unsecured debentures: These have no assets of the company as a guarantee. If the company fails to pay back the money, the investors have no right to sell any assets and may lose their money.
These debentures are riskier and have higher interest rates than secured debentures.
• Convertible debentures: These are debentures that can be changed into shares or other securities of the company at a fixed rate and price after some time.
These debentures have lower interest rates than non-convertible debentures because they give the investors a chance to own a part of the company and benefit from its growth.
• Non-convertible debentures: These are debentures that cannot be changed into shares or other securities of the company.
These debentures have higher interest rates than convertible debentures because they do not give the investors any chance to own a part of the company or benefit from its growth.
• Registered debentures: These are debentures that have the name and details of the investor who owns them.
These can be transferred to someone else only by signing a document. The company pays the interest and the principal only to the investor who owns them or their nominee.
• Bearer debentures: These are debentures that do not have the name or details of the investor who owns them.
These debentures can be transferred to someone else by just giving them. The company pays the interest and the principal to whoever has them.
Types of Shares
Equity Shares (Ordinary Shares):
- These are the most common types of shares.
- Owners (shareholders) have voting rights in company decisions.
- Dividends are not fixed and depend on the company’s profits.
- Equity shares are transferable and actively traded on stock markets.
- Shareholders bear the risk of loss if the company doesn’t perform well.
Preference Shares:
- This is a type of equity instrument.
- Owners have preferential rights to receive dividends and claim assets in case of liquidation.
- Usually non-transferable and non-voting unless there’s a default on dividend payments.
- Preference shareholders receive a fixed rate of dividend before equity shareholders.
- They are further classified into types such as, cumulative, non-cumulative, participating, non-participating, convertible, and non-convertible.
Shareholders and Debenture Holders
Shareholders and debenture holders are two types of investors who provide funds to a company. However, they have different roles and responsibilities in relation to the company.
Shareholders
Shareholders are the owners of the company who have invested their money in buying the shares of the company.
- They have a stake in the company’s share capital and are entitled to a proportionate share of the profits and assets of the company.
- They also have the right to vote on important matters affecting the company, such as the declaration of dividends, the alteration of the memorandum/ articles of association, the appointment of directors, and the merger or acquisition of the company.
Debenture Holders
Debenture holders are the creditors of the company who have lent their money to the company by buying the debentures of the company.
- They have a claim on the company’s debt and are entitled to a fixed rate of interest and the repayment of the principal amount at the end of the term of the debenture.
- They do not have any ownership or voting rights in the company, but they have a prior claim over the company’s assets and income in case of liquidation or default.
Difference Between Shareholders and Debenture Holders
Here is the basic difference between shareholders and debenture holders:
• Shareholders are the owners of the company, while debenture holders are the lenders of the company.
• Shareholders have voting rights and can influence the management and decisions of the company, while debenture holders do not have any such rights or powers.
• Shareholders receive dividends as a share of the profits of the company, while debenture holders receive interest as a fixed return on their investment.
• Shareholders have a residual claim on the assets and income of the company after paying off all the liabilities, while debenture holders have a prior claim on the assets and income of the company before paying off any other creditors.
Debentures vs Stocks: Which is Better?
Now, as the difference between Debentures and shares is highlighted, you must be thinking about which is better to invest.
Debentures are like loans – you give the company money, and they promise to pay you back with interest, no matter how well the company does.
It’s a bit safer, but you can’t easily sell it or get your money back quickly.
Shares, on the other hand, are riskier. When you buy shares, you’re buying a piece of the company. If the company does well, you can make money through dividends and selling the shares for a profit. But if the company struggles, you might lose money, and if it goes bust, you could lose everything.
Deciding between debentures and shares depends on how much risk you’re comfortable with, how much money you want to make, and other personal preferences. Debentures are safer but give lower returns, while shares can be riskier but have the potential for higher rewards.
No clear winner here – it’s all about what fits you best.
FAQs| Difference Between Shares and Debentures
A shareholder owns a piece of the company and may have voting rights, while a debenture holder lends money to the company and receives fixed interest payments without ownership or voting rights.
Preference shares represent ownership with preferential rights to dividends and assets, whereas debentures are debt instruments that pay fixed interest but don’t confer ownership or voting rights.
An IPO (Initial Public Offering) is when a private company goes public by offering shares to the public. In contrast, debentures are debt securities issued by a company, representing loans from investors.
·A share is the smallest unit of ownership in a company, while a stock is a collection of shares. In essence, owning shares means owning parts of individual companies, and owning stocks means having a portfolio of various company shares.
Yes, some debentures can be converted into shares. These are called convertible debentures. After a certain period, they can be turned into company shares at a set price. This can be good for investors as it might bring capital appreciation.
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Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.