Shares and Debentures Overview

Shares and debentures are both financial instruments where the investment can be made to fetch good returns.

The primary difference between them is their legal status; shares are owned by shareholders, while debentures are loans from investors to the issuer of the debenture.

Shares represent part ownership in a business, while debentures are debt instruments with a fixed rate of interest paid over a pre-set period of time.

Definition of Shares
Shares are financial instruments that represent partial ownership in a company. They are also known as equity or equities. Shares enable shareholders to receive profits of the company as dividend and to vote on certain corporate matters. Shares can be traded on exchanges such as the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE), allowing investors to buy and sell shares within a liquid market.

Features of Shares
Shares have certain features:

Liquidity
Shares can be bought and sold easily on exchanges. This means that investors are able to turn their shares into cash quickly if necessary.

Transferability
Shares can be transferred from one investor to another relatively easily, enabling investors to sell their shares to take advantage of profitable investment opportunities or simply exit their investments as needed.

Limited Liability
Shareholders are typically only liable up to the amount they invested in the company. They cannot be held responsible for any losses incurred by a company beyond this level.

Types of Shares
Shares can be divided into two main types:

Common Shares
Common shares represent an ownership interest in a company, typically with voting rights in corporate matters. Common shareholders have the potential to benefit from any increase in the value of the company’s assets and may receive dividends when declared by the Board of Directors.

Preference Shares
Preference shares are typically more expensive than common shares and carry limited voting rights. But, they offer certain benefits that common shares do not, such as a fixed dividend rate or priority access to profits if the company is liquidated. Preference shareholders also tend to take precedence over common shareholders if there is a decrease in the value of the company’s assets.

Definition of Debentures / Bonds
A company can generally borrow money by issuing debentures or bonds. A debenture or bond is a written acknowledgment by a company of a loan made to it. It is issued to the Investors under the seal of the Company. It contains a contract for the repayment of the principal sum at a specified date and the payment of interest at a fixed rate until the principal sum is repaid.

Features of Debentures or Bonds
If you purchase a bond, you will receive a bond certificate. This certificate spells out the terms of an agreement between the issuer and the investor.

These terms include the denomination or principal of the bond, its maturity date, the stated rate of interest, the interest payment terms, and any other agreements made between the borrower and lenders. The denomination or principal of a bond is often referred to as its face value, maturity value, or par value. It is always on this amount that the required interest payment is calculated. Investors can purchase as many of these individual bonds as they wish.

The Bonds issued by a large Public Limited Company can be traded on Stock Exchanges. It enables present and potential investors to sell and purchase bonds after their initial issue, just as they do with shares of stock.

Maturity Date
The date that the bond principal is to be repaid is called the maturity date. Bonds usually mature within 5 to 30 years from their issue date.

Stated Interest Rate and Interest Payment Dates
Most bonds have a stated interest rate that is part of the bond agreement. This rate is often referred to as the nominal interest rate; it is specified on the bond when it is issued.

Both types of investments offer advantages and risks for investors to consider before making any decisions. It is important for investors to understand the differences between shares and debentures before investing their money in either one. Ultimately, it is up to each individual investor to decide which financial instrument best suits their needs and risk tolerance.

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