Understand Distinguish Between Shares & Debentures – Intro, Benefits & Risks

TOPICS :   Business
Suresh Jacob
Suresh Jacob
Jan 29 , 2020 14 min read 394 Views Likes 0 Comments
Understand Distinguish Between Shares & Debentures – Intro, Benefits & Risks

Old players (investors) are much aware of investment market tactics which are an upper hand for them when it comes to investing in a fruitful deal. They are also aware of different types of investments and which is better for them in the long run. On the other hand, it is hard for a newbie to decide which type of investment is better for them whether they should spend in Shares/Debentures or how to invest in a share market?

The write up is a small endeavor to help you understand the Distinguish Between Shares and Debentures and how you can make sound investments in the share market.

Defining Shares and Debentures

There are two basic means through which a company lets out its shares for sale in the investment market – Shares and Debentures. If a company issues its shares to you that means you have percentage ownership in the company’s profits. On the other hand, a company takes a loan from potential investors for its growth and in lieu pays them interests on a regular basis, hence issues debentures

(such investors are called creditors).

Shares – If you have purchased certain shares in a company that means you are a partial owner in the profit of that particular firm. Profit-sharing depends on the number of shares you own in a company.

Being a legitimate shareholder in a company you have the right to vote in the company’s major decisions, you will receive dividends and you can sell your shares to the third person anytime you need money.

Shares are further segregated into two parts – Common Shares and Preferred Shares. Shareholders having common shares in a company will achieve regular dividends and enjoy basic voting rights whereas preferred shareholders have no voting rights but are given priority over common shareholders when giving repayments. Profits are first divided (as per the percentages) among preferred shareholders then the remaining sum is divided among common shareholders.

Debentures – When a company takes a loan from creditors it Issues Debentures which is proof of loan taken and that the company is assuring its creditor to pay regular interest on the loan. Owners of debentures have no voting rights in major decisions of the company. Debenture holders are more of creditors than owners in a company.

There are two kinds of debentures – convertible and non-convertible. If an investor is an owner of convertible debentures in the company then he can anytime convert his debentures into shares (looking at the profit potential of the shares). In another case, if an investor is a non-convertible debenture (NCD) holder he cannot get his debentures converted into shares.

Read Also :- All You Need to Know About Debentures, Its Types, Advantages and Disadvantages

About NCD Investments

Further, non-convertible debenture (NCD) can be secured or unsecured. The rate of interest on unsecured debentures is higher than that of secured debentures.

Information and Credit Rating Agency (ICRA) is an agency that rates the companies based on their creditworthiness. Given below are the credit ratings given by ICRA:

  • AAA – the Highest degree of safety
  • AA – High degree of safety
  • A – Adequate degree of safety
  • BBB- Moderate degree of safety
  • BB – Moderate risk of default
  • B – High risk of default
  • C – Very high risk of default
  • D- Companies are in default or are expected to be in default soon

Drawbacks of Buying NCD

  • Before purchasing an NCD, it is highly recommended to go through the risk factors associated with such debentures.
  • There is an inflationary risk on buying the debentures which means that the rate of interest offered by the company is not able to beat inflation.
  • A sudden downfall in the interest rates of such debentures may lead an investor to a loss, it is called interest rate risk.
  • A debenture holder is vulnerable to default risk in case the company goes through an unexpected financial loss.

Remember While Buying NCD

  • Find out the credit rating of the company
  • Get the details of the company’s financial background.
  • Get the knowledge of the company’s past performance (this will help you know the potential of a company).

How You Can Make An Investment?

Investors can purchase shares in a company either via IPO (Initial Public Offer) or later they can purchase shares when a company gets listed on the exchange. Similarly, debentures can be bought by an investor initially via public offers or later can buy them in the secondary market. It is now mandatory for an investor to maintain a Demat account if he is dealing with Shares or Debentures.

Read Also:- Equity Shares: Classification, Benefits & Drawbacks

Shares V/S Debentures:

One can invest either in shares or debenture based on the profit efficiency and ability of the investor to invest. Your choice is also governed by your risk-taking abilities like shares that may yield more profits than debentures but are riskier. So if you are ready to take a high risk to earn considerable profits then invest in shares.

Make sure to have a clear picture of profits in both the cases before putting your money in either of the two options

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