When it comes to investing many people get confused between buying shares and buying debentures. Both are ways to invest money into a company but they are very different in their structure returns and risks. If you want to build a smart portfolio it is important to know the difference between debentures and shares clearly.
In this article we will explain the basic concepts of debentures and shares how they work and how they fit into the larger space of Bonds investment in India.
What Are Shares?
Shares represent ownership in a company. When you buy shares you become a shareholder which means you own a part of the company. You are entitled to a share of the company’s profits which may come in the form of dividends. You also have voting rights in important company decisions.
However with ownership comes risk. If the company performs poorly the value of your shares can fall. In extreme cases if a company goes bankrupt shareholders are the last to get paid after all debts are cleared.
What Are Debentures?
Debentures are a type of debt instrument. When you buy a debenture you are lending money to the company. In return the company promises to pay you interest at a fixed rate and repay the principal amount on maturity. You do not get ownership in the company by buying debentures.
Debenture holders are considered creditors. In case the company faces financial trouble debenture holders are paid before shareholders but after secured creditors.
Debentures are important when you think about Bonds investment because they offer steady returns with lower risk compared to shares.
Difference Between Debentures and Shares
Let us understand the difference between debentures and shares more clearly:
- Ownership
- Shares represent ownership in the company.
- Debentures represent a loan given to the company.
- Returns
- Shareholders earn returns through dividends and capital gains if the stock price rises.
- Debenture holders earn fixed interest income regardless of the company's profits.
- Risk
- Shares are riskier because their value can fluctuate widely.
- Debentures are less risky because of the fixed income and priority in payments.
- Priority in Repayment
- Debenture holders are paid before shareholders if the company winds up.
- Shareholders are paid only after all creditors are settled.
- Voting Rights
- Shareholders have voting rights in the company.
- Debenture holders have no voting rights.
How Debentures Fit into Bonds Investment in India
In the growing space of Bonds investment, debentures are an attractive option for investors who want regular income with lower risk. Many companies issue non-convertible debentures (NCDs) to raise funds. These NCDs are listed on stock exchanges and are easily accessible to retail investors through online platforms.
With the Indian bond market expanding, more people are looking at debentures to diversify their portfolios and earn steady returns without getting into the volatility of stock markets.
Final Thoughts
Understanding the difference between debentures and shares is important when you are building an investment plan. Shares offer the potential for higher returns but come with higher risks. Debentures offer stable and predictable returns with lower risks but without ownership benefits.
If you are looking for regular income and safety along with your stock investments it is wise to include debentures and other bonds in your portfolio.
As Bonds investment continues to grow now is a great time to explore debentures as a smart addition to your overall investment strategy.
