The most common financial instruments in the stock market are shares and debentures. Although they have some differences, investors are likely to invest in both of them to diversify their portfolio. These financial securities are issued by a company with an aim to raise capital, which is used further for the growth and expansion of the organisation.
What are Shares?
Shares, in simple words, are the units of ownership of a company. Once the company issues shares in the market, any one with a demat account is eligible to buy them. After their purchase, investors become entitled to a part ownership in the company. As the investors become part owners, they also become partly responsible for contributing to the company’s growth by using their voting rights.
The shares are purchased at a certain price known as ‘share price’. After buying shares, these investors also receive an income as part of the profit that the company earns during the financial year.
There are two types of shares in the market — equity shares and preference shares.
What are Debentures?
Debentures are also a source of the inflow of capital for a company. A debenture is a debt instrument used to raise funds in the form of loans from the public, especially potential investors. However, these loans can be taken from the banks as well but apart from the bank loans, companies choose the route of debentures to receive funding from the public.
In exchange for the loan, the company gives an acknowledgement to the debenture holder stating that it would return the principal along with interest after a predetermined period. Besides, there are three categories of debentures. They are perpetual debentures, convertible debentures and non-convertible debentures.
Difference between Shares and Debentures
Shares and debentures, although issued for the same purpose, have different characteristics.
Firstly, shares are seen as an ownership capital issued by the company to investors who buy shares. So, the buyer is called the shareholder. Whereas, debentures are the debt instruments that serve the purpose of raising funds through loans from the public. The lender is known as a debenture holder.
After buying shares, the shareholders receive income in the form of dividend. On the other hand, the debenture holders receive income through the payment of interest that the firm gives.
Having gained a part ownership in the company, shareholders also receive voting rights in the company. But debenture holders are seen as mere lenders and aren’t given any ownership. So, they don’t enjoy any voting rights.
So, we can highlight that shares are issued to investors who want to take a part ownership in the company and its growth, whereas debentures are issued to investors who want to be the lenders so that they can receive their money back with interest after a stipulated time period.