How Do Equity Shares Differ From Debentures?

When a company needs money, it can raise it in different ways. Two popular methods are equity shares and debentures. Both give money to the company but work in very different ways. If you are new to investing, don't worry — in this blog, we will explain these terms in a simple way, so you can understand which one suits you.

1. Ownership vs Lending

Equity shares and debentures are two ways companies raise money. They differ mainly in ownership and lending.

Equity shares mean you own a part of the company. You get dividends if the company makes a profit. You also have voting rights in company decisions.

Debentures are loans you give to the company. You earn fixed interest, even if the company does not make a profit. You do not have any ownership or voting rights.

 A simple comparison:

Example:

Yogita had ₹10,000 to invest.

• She bought 100 equity shares of XYZ Ltd. at ₹100 each. She became a part-owner of the company. If the company made a profit, she might receive dividends. She also gained voting rights in company meetings.
  
  
• Alternatively, she could have purchased 1 debenture of XYZ Ltd. worth ₹10,000. This would mean she lent money to the company. In return, the company would pay her a fixed interest, say 8% annually, regardless of its profit. However, she would not have any ownership or voting rights.

2. Returns

Equity shares and debentures offer different types of returns. Equity shares can provide high returns through dividends and price increases, but they come with higher risk. Debentures offer fixed interest payments, making them safer but with lower returns.

Example:

Imran had ₹50,000 to invest.

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• He bought 500 equity shares of ABC Ltd. at ₹100 each. Over a year, the share price increased to ₹110, and he received a dividend of ₹2 per share. His total return was ₹7,000 (₹5,000 from price increase + ₹1,000 from dividends).
  
  
• Alternatively, he could have purchased debentures worth ₹50,000 from ABC Ltd., offering a fixed interest rate of 6% per annum. After a year, he would have earned ₹3,000 as interest.

A simple comparison:

Choose equity shares if you want higher returns and can handle risk. Choose debentures for steady income with less risk.

3. Voting Rights

Equity shares and debentures differ in voting rights. Equity shareholders have the right to vote on company decisions, while debenture holders do not.

Example:

Vayu had ₹10,000 to invest. He bought equity shares worth ₹5,000 and debentures worth ₹5,000. After one year, the company paid him ₹400 as dividend on shares and ₹500 as interest on debentures. He could vote in meetings because he owned shares, but not for debentures.

In summary, equity shareholders can influence company decisions through voting, while debenture holders, as creditors, do not have this right.

4. Risk and Return

Equity shares and debentures differ in risk and return. Equity shares offer higher returns through dividends and capital gains, but come with higher risk due to market fluctuations. Debentures provide fixed interest income with lower risk, making them suitable for conservative investors.

Example:

Karan had ₹20,000 to invest. He decided to split his investment equally, putting ₹10,000 into equity shares and ₹10,000 into debentures. After one year, the equity shares appreciated by 10%, earning him ₹1,000, while the debentures provided a fixed interest income of ₹800. This illustrates how equity shares can offer higher returns with higher risk, whereas debentures provide more stable but lower returns.

Comparison: Equity Shares vs. Debentures

5. Redemption

Equity shares and debentures differ in how they are redeemed. Equity shares are not typically redeemed; they represent ownership in the company and remain until the company decides to buy them back. 

Debentures, on the other hand, are debt instruments with a fixed maturity date, at which point the company repays the principal amount to the debenture holders.

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Example:

Raghav invested ₹10,000 in equity shares and ₹10,000 in debentures. After 5 years, the company redeemed the debentures, returning ₹10,000 to Raghav. However, his equity shares remained with the company, as they do not have a fixed redemption period.

A simple comparison:

In summary, equity shares represent ongoing ownership without a set redemption, while debentures are loans that the company repays at a specified time.

Conclusion

Equity shares make you a company owner with voting rights and possibly high returns, but they are risky. Debentures are loans with fixed interest and lower risk, but no ownership. Shares do not expire, while debentures are repaid after some time. Choose shares for growth or debentures for steady income.

FAQs

1. What is the main difference between equity shares and debentures?

Equity shares give ownership in a company, while debentures are loans with fixed interest.

2. Which is safer, equity shares or debentures?

Debentures are safer as they give fixed returns, while shares depend on company profits.

3. Can equity shares and debentures be sold in the market?

Yes, shares trade on stock markets while debentures trade on exchanges or privately.