• HDFC
• 03 Jan 2023
• Knowledge Centre

HDFC, Tester

A company can raise capital through various means like equity or debt. The most popular among these are the shares and debentures through which the company raises capital for its operations. While shares form the owner’s capital, debentures are a form of debt capital.

From investors’ point of view, both shares and debentures offer decent investment options and including both in the portfolio can help diversify the investment into different asset classes and manage their risks. However, investing in equity shares and debentures depends upon investors’ goals, risk appetite and market conditions.

Let us understand the difference between shares and debentures.

What Are Shares?

Shares or stocks are the units of ownership of the company. The companies issue these shares to general investors to raise funds when they go public for the first time and get listed on stock exchanges.

The shareholders are the part owners of the company and the fund raised from issuing equity shares is the equity capital or owners’ capital. These shares are traded on stock exchanges. The shareholders of a company receive regular dividends as a share of the profit the company makes. However, dividend payout is done only when the company makes profits.

Shareholders also have the right to vote in company matters. But, they are the last ones to get paid in case of liquidation of the company. There are two broad types of shares, Equity shares and Preference shares.

The share price of a company is dependent upon various factors like demand and supply, the company’s performance and financials, the macroeconomic situation and industry conditions.

What Are Debentures?

A Debenture is a debt instrument issued by a company under its seal to raise funds as loans from investors. It forms borrowed capital of the issuing company. Debenture certificates are an acknowledgement of a loan taken by the company from the debenture holders.

Debentures carry interest as it is a type of loan capital. The debenture holders are the creditors of the company and receive interest in regular intervals which comes over and above the company’s profit.

However, a debenture is backed only by the creditworthiness of the issuing company and hence, it is not a secured loan. In case of bankruptcy of the issuing company, debenture holders have the first claim over its assets.

Some of the types and categories of debentures are Perpetual Debentures, Convertible Debentures, Non-convertible Debentures, Redeemable Debentures, Non-redeemable Debentures, Secured Debentures and Unsecured Debentures.

Let us now distinguish between shares and debentures:

Nature: Equity shares are the units of ownership capital issued by a company to the public. A Debenture is a debt instrument that a company issues to raise loans.

Status: Shareholders are part owners of the company and enjoy ownership status. Debenture holders are the creditors of the company.

Capital: Equity capital is the owned capital, while capital raised through debentures is the borrowed capital.

Voting rights: Shares carry voting rights, while debentures do not carry any voting rights in the company.

Return: Shareholders get dividends as a part of the profit of the company. Debentures carry interest and the interest rate is fixed or floating.

Security: Shares are not secured. Debentures are unsecured loans, but capital repayment is assured.

Conversion: Shares cannot be converted into debentures, while debentures can be converted to equity shares.

Liquidation: In the event of the company’s liquidation, shareholders are given the last priority, while debenture holders get priority in repayment.

In conclusion, both, shares and debentures are good ways to invest in a company. Choosing between the two depends upon the investors’ risk appetite, investment profile and goals.