Shares vs Debentures

Difference Between Shares vs Debentures

A debenture is a medium to long term debt instrument for a company, which is used to raise capital from the investors, at a fixed rate of interest. These are mostly repayable on a fixed date.

When a portion of the capital is raised through the general public by way of a primary capital market it is termed share capital of the company. A share is an indivisible unit of capital, thereby giving ownership to the shareholder and creating an ownership relationship between the company and the shareholder.

Head To Head Comparison Between Shares vs Debentures (Infographics)

Below is the top 13 difference between Shares vs Debentures

Key Differences Between Shares vs Debentures

Both Shares vs Debentures is popular choices in the market. let us discuss some of the major Difference Between Shares vs Debentures:

1. The shares are the owned capital of the company, whereas debentures are instruments to raise debt for the company. In order to raise debentures, there is no need to do any backing or underlying asset, but sheer reputation in the market. Investors would be more interested in how well a company can repay the interests regularly. The share capital is raised through the stocks and shares from the market. Investors, before putting their money into the company shares, need to read through their books of accounts, the prospective growth areas, and peer comparison and only then invest money in a business.
2. The risk involved: Many investors buy debentures of a company as they carry lesser market-driven risk and promises a fixed income regularly in the form of interest payment. On the other hand, shares attract investors who not only foresee the value or growth of the company but are ready to take a risk. Return on shares is, therefore, higher than the interest received on debentures. The interest percentage also remains fixed over the period of time it has been taken for. However, shares can give you higher profits, only subject to the market risks.
3. A ratio between Debt and Share Capital of the company: In a normal operation of a business, debt should be capable of covering the Equity. It just signifies that a company has good cash management and debt-handling capacity. It signifies how much of the share capital can be leveraged to raise debt from the market.
4. Companies as well as government float debentures in the market in order to raise money for their financial and other long term requirements. Their interest remains fixed for the predetermined period for which the money is lent. On the other hand, Shares can be issued by a company only if it is a public company, i.e. it Is listed on the national stock exchanges of the country. A company is able to raise money only when there are more buyers in the market for its stock than the sellers.

Shares vs Debentures Comparison Table

Below is the topmost comparison between Shares vs Debentures:

Conclusion

Both forms of capital have their own merits and demerits. Investors and stakeholders should do their research well and arrive not just in deciding their own risk appetite but also the financial capacity and growth of the business they want to invest in. Shares vs debentures both form an integral part of a company’s capital. It is worth a study on how different type of companies and industries function to increase or reduce the ratio between these depending on their requirements.

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