The difference between shares and debentures is basically the difference an investor or business house needs to know, as the former represents either a raised capital instrument or a tool for raising capital while the latter differs in terms of ownership, risk, returns, and structure. Deeds represent ownership of a company in the issue process to the shareholder who has voting rights and rights in respect of dividends; on the other hand, debentures represent a debt obligation through which the issuer obliges himself to pay a fixed rate of interest without any right to owning the capital. To this end, one needs to grasp how this difference impacts investment decisions and what considerations companies should think about when determining their capital structure.
A debenture is basically a debt instrument, which companies issue to raise funds from investors. When a company issues debentures, it is simply taking money from the public with an undertaking to pay a fixed rate of interest periodically and to eventually repay the principal sum after the completion of the term. While not secured by any specific assets except in the case of secured debentures, debentures are considered to be an obligation of the company. They do not give any ownership right, and the return comes in the form of interest rather than sharing any profit or giving any dividend.
Key features of debentures include:
Debentures are a means through which companies can flexibly raise funds without shareholder and share issues.
Shares represent ownership in a firm. Once the person or institution acquires shares, one represents becoming part-owner of a firm with a share of that firm’s earnings in the form of dividends. Further on, one represents the shareholders by bestowing rights to vote on certain issues concerning the firm, such as the election of directors or approval of significant business activities. The value of the shares varies with the company’s performance, market conditions, and investor sentiment.
Shareholders have the last claim on assets in case of liquidation after the creditors and debenture holders have been paid.
There are two main types of shares that companies issue: common shares and preferred shares. Each type of share provides different rights and benefits to shareholders.
Equity shares are the owners’ main shareholding in a firm and carry voting powers. In equity shares, the equity holders wield the voting power of the company, and hence, they elect board members.
They have the right to receive dividends, but the amount is not guaranteed and is distributed depending on the firm’s profits. If the firm is facing financial weakness, then owners of equity shares don’t get even a single penny as pay. Given the fact that equity shares have a claim on the assets of the company at the final stage of liquidation, it is, therefore, a riskier investment vehicle compared to other forms of capital.
Prefers do not carry voting rights but have precedence over equity shares as far as dividends and liquidation are concerned. The dividend on preference shares is normally fixed, which means preference shareholders are entitled to a fixed percentage of dividends before any goes to equity shareholders. Preference shareholders in cases of liquidation are paid before equity shareholders but after debenture holders.
Debentures fall under several heads on different criteria, such as security, convertibility, and tenure. Some of the most common types of debentures are the following:
Secured by the company’s assets, or in case of default of the company, the holders of the debentures can claim the securities attached to the debentures.
Neither is asset-guaranteed. They are also more dangerous to investors, as it depends on the strength of the financial capability and creditworthiness of the issuing company alone.
The debentures can be converted into equity shares after a specified period or on certain specific conditions and thus may offer the holder an opportunity to take advantage of upward pressure on the share price.
They cannot be converted into equity shares; they exist only as a debt instrument. Normally, NCDs carry more interest as redemption is not possible.
They bear a fixed maturity, where the company is expected to repay the principal amount to the debenture holders at the maturity of the debentures.
There is no specified maturity date. The company may not be liable to pay the principal, although interest is paid periodically.
An investor can opt to invest in debentures or shares, depending on his or her level of tolerance for risk, his or her financial goals, and the involvement he or she desires to have in the company he wants. Here is a comparative analysis:
| Criteria | Debentures | Shares |
| Nature | Debt instrument | Ownership instrument |
| Risk Level | Lower risk, as debenture holders are paid interest regardless of company profits | Higher risk and returns depend on company performance. |
| Return Type | Fixed interest | Dividends (if declared) and capital appreciation |
| Security | Secured or unsecured | No security. Value depends on company performance. |
| Voting Rights | No voting rights | Voting rights for equity shareholders |
| Priority in Liquidation | Higher priority than shareholders | Last claim on assets |
| Convertibility | Convertible into shares (optional) | Not convertible |
Debentures: Most suitable for the risk-averse investor who needs fixed returns and a reduced risk.
Shares: Best for the risk-taker investor seeking a higher return through dividends as well as capital gains with accompanying voting rights.
This mainly differs between shares and debentures in terms of their nature, risk profiles, and rights they carry in a business. Shares provide ownership in the company with the rights to vote and potential dividends; the risks associated are higher since the returns depend on the kind of performances that a company puts out into the market. Debentures provide fixed-interest payments, lower risk, and no ownership rights. It is a matter of choice for the individual investor, based on his risk appetite, financial goals, and whether he prefers stability or growth.
Shares give an ownership position in a company, while debentures are debt instruments that are given to no one due to rights in a company but do provide periodic fixed interest payments.
Shares are available to risk-taking investors who invest for capital appreciation and get dividends and wish to share the decision-making with the shareholders through voting rights.
Debentures pay interest that is fixed and periodic. Debentures, are at a lesser risk of shares since preference is given to them for liquidation payment.
Convertible debentures can be converted into equity shares either after a certain period of time or on the happening of certain definite events.
A debenture, being safer, provides a fixed amount of interest and has better rights to the assets of the company in case of liquidation, as opposed to shares, which have a higher risk with potentially higher returns.
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