Distinguish between shares and debentures?

Question: Distinguish between shares and debentures?

Shares and debentures are both methods companies use to raise capital, but they differ significantly:

Ownership:

Shares represent ownership in a company. When you buy shares, you become a part-owner or shareholder, with voting rights and a claim on a portion of the company’s profits (dividends).

Debentures are a form of debt. When you buy debentures, you lend money to the company and become a creditor, earning interest over time without owning a part of the company.

Returns:

Shares offer dividends, which are portions of the company’s profits. These returns can vary based on the company's performance.

Debentures provide fixed interest payments, which are predetermined and generally paid out periodically, offering more predictable returns.

Risk:

Shares carry higher risk since their value fluctuates with the company's performance and market conditions. Shareholders bear the risk of losing their investment if the company fails.

Debentures are usually considered safer as they promise fixed returns. Debenture holders are paid before shareholders in the event of liquidation.

Term:

Shares are usually permanent unless the company buys them back.

Debentures have a fixed maturity period, after which the company repays the principal amount to the debenture holders.

Priority:

Shares are lower in priority in the case of liquidation. Shareholders are paid after debenture holders and other creditors.

Debentures are higher in priority, making them a safer investment in case the company goes bankrupt.

Understanding these differences can help you make more informed investment decisions. 

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