Shares and debentures are two investment instruments that companies use to raise capital and they allow individuals to invest directly with different companies.
While both are popular mediums of investment, they differ significantly in ownership, risk, and return potential. Read on to learn the key differences between shares and debentures so you can make well-informed investment decisions.
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What are the Differences Between Shares and debentures?
1. Ownership and Equity:
- Shares represent ownership in a company. Hence, when someone purchases them, they become a company shareholder. With ownership comes voting rights and the potential of returns in the form of dividends and an increase in prices.
- Debentures do not confer ownership rights. When investing in debentures, investors lend money to the company in return for interest payments. Also, they do not participate in its management or decision-making processes. Debenture holders remain creditors without voting rights.
2. Returns and Risk:
- Shareholders have an equal stake in the profits and losses of a company. So, they receive dividends when the company performs well. Also, they risk losing their investment if the company performs poorly. Their return depends on the company's financial performance.
- Debenture holders receive regular interest payments regardless of company profitability. Moreover, these interest payments are contractual and therefore guaranteed by them. Debentures offer more stable income streams but less potential capital appreciation than shares.
- Shares typically cannot be converted into other securities issued by the company. But shareholders can purchase and sell on the open market.
- Debentures may be convertible. Convertible debentures allow their holders to convert them to equity shares at a predetermined ratio, allowing debenture holders to become shareholders.
4. Priority in Liquidation:
- In the event of company liquidation or bankruptcy, shareholders are often the last in line for payments after all other obligations, such as debtor payments and creditors, have been met. They also bear a greater risk that their investment could be lost entirely.
- Debenture holders enjoy greater priority in liquidation proceedings. Their claims are settled before those of shareholders. Hence, if financial distress strikes a company, this increases their chance of recovering their principal investment.
5. Voting Rights:
- Shareholders have voting rights in the company's decision-making processes. The number of votes typically corresponds to the number of shares owned, giving larger shareholders more influence.
- Debenture holders do not have voting rights in the company's affairs as they are passive investors.
Shares and debentures are financial instruments that meet various investment goals and risk tolerance levels. Shares provide ownership and the potential for higher returns but with higher volatility.
Yet, debt provides fixed income streams without ownership benefits, thus helping investors make informed decisions regarding their portfolios. Investors must understand these differences to make educated choices when selecting portfolio investments.
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