Businesses require substantial financial resources to fund growth, expansion, and new ventures. To secure these funds, companies typically rely on two primary financial instruments: shares and debentures. While both serve as effective fundraising tools, they function in distinctly different ways, each carrying unique rights, obligations, and implications for the company and its investors. Shares represent ownership in the company, granting shareholders voting rights and a stake in profits, whereas debentures function as debt instruments, enabling companies to borrow funds with a fixed repayment structure. Understanding the nuances between shares and debentures is crucial for investors and businesses alike, as it helps them make informed financial decisions based on risk tolerance, return expectations, and long-term objectives.
- What Are Shares?
Shares represent ownership in a company. When you buy a share of a company, you become a part-owner (also called a shareholder). This means you’re entitled to a portion of the company’s profits and have a say in some decisions, depending on the type of share you own.
Types of Shares:
- Equity Shares (Common Shares):
- These are the most common type.
- Shareholders get voting rights.
- Profits are shared through dividends, but not guaranteed. If the company does well, you benefit. If not, you don’t.
- You bear more risk but also stand to gain more if the company grows.
- Preference Shares:
- Shareholders get a fixed dividend before equity shareholders.
- Usually don’t have voting rights.
- Less risky than equity shares but also usually less profitable.
Why Do Companies Issue Shares?
Companies issue shares to raise capital without taking on debt. This means they don’t have to repay the money, but they do give up a piece of ownership. It’s like getting a business partner who puts in money and shares profits.
Advantages for Shareholders:
- Potential for high returns through dividends and rising share prices.
- Voting rights in company decisions.
- Ownership in a growing business.
Risks:
- If the company performs poorly, share value can drop.
- No guaranteed income – dividends may not be paid.
- What Are Debentures?
Debentures are a type of loan taken by a company. When you buy a debenture, you’re lending money to the company. In return, the company promises to pay you interest regularly and return your money after a fixed time.
Unlike shareholders, debenture holders are creditors, not owners. This means they don’t get any ownership or say in how the company is run.
Types of Debentures:
- Secured Debentures:
- Backed by company assets. If the company fails, the asset can be sold to repay you.
- Unsecured Debentures:
- Not backed by assets. Riskier and thus may offer higher interest.
- Convertible Debentures:
- Can be converted into shares after a certain period.
- Non-convertible Debentures:
- Cannot be converted into shares. Just regular loans with interest.
Why Do Companies Issue Debentures?
Companies use debentures to raise money without giving up ownership. It’s like taking a loan from investors / general public instead of a bank.
Advantages for Debenture Holders:
- Fixed interest income, usually paid yearly or half-yearly.
- Less risky compared to shares because you get paid before shareholders in case of liquidation.
Risks:
- If the company goes bankrupt and debentures are unsecured, you may not get your money back.
- Interest rates may not keep up with inflation.
Key Differences Between Shares and Debentures:
| Feature | Shares | Debentures |
| Ownership | Yes – proportionate owner of the company | No – just a lender |
| Returns | Dividends (not guaranteed) | Fixed interest (guaranteed) |
| Risk Level | Higher risk, higher reward | Lower risk, fixed income |
| Voting Rights | Yes (for equity shareholders) | No |
| Repayment | No repayment – it’s ownership | Repaid after a fixed period |
| Priority on liquidation | Last in line | Priority over shareholders |
Which One Should You Choose?
- If you want to grow your money and don’t mind a bit of risk, shares can be a good option.
- If you prefer steady income with lower risk, debentures might be more suitable.
A smart investor often keeps a mix of both in their portfolio – shares for growth, and debentures for safety and income.
Conclusion
Shares and debentures are both important tools for companies to raise funds, and for investors to grow their wealth. The choice between them depends on your financial goals and risk tolerance. Understanding how they work can help you make better decisions, whether you’re a business owner, investor, or just curious about how the financial world runs.
Author
Mr. Alankar Maske
Intern
Pavan Goyal and Associates (Chartered Accountants)
Office No. B212, GO Square, Mankar Chowk, Wakad, Pune 411057
Email – office@goyalca.com
Contact – 9762763351