Debentures Vs Shares: Where Should You Invest?
When investing your hard-earned money in a company, there’s a question that comes to mind. Whether I should invest in Shares or Debentures? Well, we will take a look at what are they and what will suit your investment needs.
Shares
Shares are technically a unit of ownership of the company. When one buys a share they become the owner of the company. They earn profits in the form of dividends and price appreciation. Dividends are money paid to shareholders out of the profits of the company. However, many people in the share market earn by buying and selling shares when their base prices rise. Also, Shareholders may earn dividends but they also will have to bear the loss if the company is going downhill since shares prices may fall. Also in case if a company solvency (when the business is shutting down), shareholders may suffer a loss since they’re not the first preference to get their money back (exception – Preference shareholders). Shares have the potential to make someone rich but it also has a lot of risks if not invested wisely .
There are mainly two types of share :
a) Equity shares: come with benefits like ownership, voting rights in the company, but also are risky
b) Preference shares: come with preference to the profits and assets of the company in case of dissolution
Debentures
Debentures are generally a type of debt instrument and are unsecured bonds (i.e. They have the risk of suffering losses). A company issue debentures to raise the capital but without ownership of the company. When the company is in need of loan or capital but doesn't want to give up on the percentage ownership it issues debentures . Debenture holders receive interest from time to time on their debentures which are gains for them. At the maturity of the debenture, the company pays the principal amount of debentures back to the particular debenture holders. Various factors affect the rate of interest a company gives . It generally has less risk because, in case of dissolution of the company, preference is given to debenture holders over shareholders. One important fact is that a debenture is a type of bond, while all bonds cannot be debentures since they’re a bigger term.
Coming to the question, which one will be better for investing?
If one belives in the company and wants to be a part of its sucess and in turn wants to generate higher profits then owning the share of that particular company is the correct option. But one must be willing to take the financial risk which comes with ownership of share. If you aren’t willing to take the risk while investing then you must avoid shares. Knowing the company, their future and having good knowledge of the market will help a lot in reducing the risk which comes with the share market. Some people say the share market is a gamble, well not if one invests wisely.
The second option, debenture, is suitable for people who want to invest for a long period of time and also don’t want to take huge risks. A debenture is more secured since the principal amount has to be paid at the time of maturity and also bondholders are preferred to be paid ahead of shareholders when it comes to solvency(when the company dissolves). Although the profit here may be less, even the risk involved here is less as compared to shares. If one is in a position to invest money for a longer duration securely then Debentures are indeed, a good option for them, not shares.
Coming to a conclusion, we can say that both shares and debentures have their pros and cons. Hence one must compare and choose correctly which option suits them best and also make sure to always invest wisely.