Debentures vs shares: What is the difference? Key features, returns and risks explained

In the country’s ever-evolving and dynamic corporate landscape, companies raise funds either by issuing shares, which provide ownership, or debentures, which are loans. Acknowledging and understanding both is critical for informed investing and consistent portfolio management.

Here, we examine the difference between the two and the associated concepts in detail. Let us begin with debentures.

Debentures: Fixed returns and creditor status

1. Debentures are nothing but loans provided to companies by investors. In this case, debentures basically offer fixed returns to investors through interest payments.
2. These investment assets have a pre-determined maturity date, after which the principal amount of the investor is repaid to them.
3. As a debenture holder, you are nothing but a creditor. Your claims take priority over those of shareholders in the event of the company's liquidation.

Types of debentures:

• Convertible Debentures: These debentures are converted into shares at a later date.
• Non-convertible Debentures: These debentures remain in the form of loans till maturity, and they cannot be converted into shares.

Shares: Ownership and market-linked returns

1. When you invest in shares, you become a part-owner of the company.
2. Returns in stock investing come through stock appreciation based on the solid results of companies. These returns are posted quarterly and provide shareholders with an idea about the business.
3. Apart from stock appreciation, returns are also made in stock investing through dividends and buybacks. Still, on a fundamental level, none of these is guaranteed.
4. Common shares offer voting rights; preference shares provide priority on dividends, but generally do not come with voting rights.

Types of shares:

• Common shares: These shares provide investors with voting rights, a last claim in the event of company liquidation, and the right to receive dividends if the company chooses to distribute them to shareholders.
• Preference shares: These shares provide investors with fixed dividends and priority on assets after debenture holders. Still, there are no voting rights provided to investors generally in the case of preference shares.

Core Differences: Debentures vs Shares

Note: The differences and features discussed above are illustrative in nature. For the updated differences, terms and conditions on investing in stocks or debentures, reach out to the official website of companies issuing these asset classes.

Important takeaways for investors

Both these assets are designed to serve different investment objectives.

• Debentures are suitable for investors who seek a stable income and are unwilling to take on higher risks with their investments. Preferably, mature and stability preferring investors can look to invest in such asset classes.
• Shares are suitable for those investors who are aiming for long-term wealth creation and are willing to take on a higher amount of risk in comparison with other safer alternatives, such as bonds, debentures, fixed deposits, etc. Preferably, college pass-outs and young investors in their 30s can look to invest in shares.

It is fair to state that both asset classes have distinct and unique features. Before investing in any particular asset class, it is always prudent to sit down with a certified financial advisor and forge a sensible long-term wealth creation strategy, according to one’s goals and current financial situation, so that an informed investment decision can be made.

Disclaimer: The information contained in this article is for general informational purposes only and does not constitute investment advice. All investments, including debentures and shares, carry inherent risks. Readers should conduct their own due diligence and consult licensed financial professionals before making any investment decisions.