A debenture is more secure than a stock, but not as secure as a bond. In case of bankruptcy, you have no collateral you can claim from the company. To compensate for this, companies pay higher interest rates to debenture holders. All investments including stocks, bonds, and debentures, carry an element of risk.
Are debentures less risky?
Because debentures are debt securities, they tend to be less risky than investing in the same company’s common stock or preferred shares. Debenture holders would also be considered more senior and take priority over those other types of investments in the case of bankruptcy.
Debentures and shares are both used by a company to raise capital funds from the market. But they are very different in their characteristics.
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Difference Between Shares and Debentures.
| Areas compared | Shares | Debentures |
|---|---|---|
| Risk | High risk | Secured investment |
| Voting rights | Shareholders have voting rights in the company | Debenture holders don’t have any rights to vote |
Unlike shareholders, the debenture holders who are the creditor of the company do not hold any voting rights. The debentures are of following types: Secured Debentures. Convertible Debentures.
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| Shares | Debentures |
|---|---|
| Shares cannot be converted into Debentures. | However, debentures can easily be converted into Shares. |
| Trust Deed | |
What are the pros and cons of debentures?
Advantages and disadvantages of Investing in a Debenture
| Advantages | Disadvantages |
|---|---|
| Debentures are debt instruments issued by the company that promises a fixed interest rate on the due date. | The payment of interest and principal becomes a financial burden for the company in case of no profits. |
What are the disadvantages of debenture?
Disadvantages of Debentures
- Each company has certain borrowing capacity. …
- With redeemable debenture, the company has to make provisions for repayment on the specified date, even during periods of financial strain on the company.
- Debenture put a permanent burden on the earnings of a company.
Is it good to invest in debentures?
The most common form of repayment is called a redemption out of capital. Through this redemption, the issuing company makes a lump sum payment on the date of maturity. A substantial portion of the bonds traded on standard bond platforms is debentures. Thus, debentures can be easier to invest in than secured bonds.
Are debentures safe?
Strictly speaking, a U.S. Treasury bond and a U.S. Treasury bill are both debentures. They are not secured by collateral, yet they are considered risk-free. Similarly, debentures are the most common form of long-term debt instruments issued by corporations.
Pros of Buying Stocks Instead of Bonds
The chief advantage stocks have over bonds, is their ability to generate higher returns. Consequently, investors who are willing to take on greater risks in exchange for the potential to benefit from rising stock prices would be better off choosing stocks.
Share is the capital of the company, but Debenture is the debt of the company. The shares represent ownership of the shareholders in the company. On the other hand, debentures represent indebtedness of the company. The income earned on shares is the dividend, but the income earned on debentures is interest.
A Share Certificate is issued against the shares, regardless of the fact that the shares are fully paid up or partly paid up. Conversely, Share Warrant is issued by the public company only against fully paid up shares.
Merits of Debentures over Equity Shares (i) Debentures are preferred by investors who want fixed income at lesser risk. (ii) Debentures are fixed charge funds and do not participate in profits of the company. (iii) The issue of debentures is suitable in the situation when the sales and earnings are relatively stable.
The use of debentures can encourage long-term funding to grow a business. It is also cost-effective when compared with other forms of lending. Debentures usually provide a fixed rate of interest for the lender, and this has to be paid before any dividends are issued to shareholders.
Shareholders are the owners of the company. Debenture holders are merely lenders to the company and are considered to be creditors. Shareholders actively participate in the decision making process of the company. Debenture holders cannot participate in the decision making process.