Explore how shares and debentures differ in ownership rights, returns, risk, and suitability for investors.
Shares and debentures are two widely used financial instruments through which companies raise capital from the public and institutions. Although both serve the purpose of funding business operations or expansion, they differ significantly in nature and investor benefits. Shares provide equity ownership, giving shareholders a stake in the company’s profits and voting rights. Debentures, on the other hand, are fixed-income instruments representing a company’s obligation to repay borrowed money with interest. Understanding the fundamental differences between these two helps investors align their investment choices with their financial goals, risk tolerance, and expected returns..
Shares represent a stake in a company’s equity. Shareholders become part-owners and share in profits, often via dividends, and may gain from capital growth.
Ownership Rights: Voting power in annual general meetings
Dividend Income: Variable, dependent on profits
Return Potential: Higher returns possible through price appreciation
Risk Level: High—returns are not guaranteed; principal is at risk during business distress
Debentures are financial instruments that allow companies to borrow funds from investors for the long term. When an investor buys a debenture, they are effectively extending a loan to the issuing company, which agrees to pay periodic interest and return the principal amount at the end of the term. Most debentures are not secured by physical assets, meaning they depend on the issuer’s reputation and financial stability—though some may be secured by collateral. Since debentures do not involve sharing ownership, companies often use them to raise capital while maintaining full control of their equity.
Creditor Status: Debenture holders are lenders, not owners
Fixed Interest Income: Regular interest payments, usually half-yearly
Priority in Repayment: Paid before shareholders during liquidation
The table below outlines the fundamental differences between shares and debentures across key investment attributes.
| Feature |
Shares |
Debentures |
|---|---|---|
| Nature |
Equity — ownership |
Debt — creditor relationship |
| Income |
Dividends (variable) |
Fixed interest |
| Risk Level |
High—dependent on business prosperity |
Lower—subject to creditworthiness |
| Voting Rights |
Shareholders have voting rights |
No voting rights for debenture holders |
| Repayment Order |
Paid last in liquidation |
Paid before shareholders in priority |
| Capital Gains |
Potentially high upside |
Limited to interest return |
| Returns |
Uncertain but potentially higher in long run |
Fixed and predictable, generally lower |
| Investors |
Suited for risk-tolerant, growth-focused |
Suited for conservative, income-focused investors |
| In case of liquidation |
Residual claim on assets (if any) |
First claim over shareholders, up to principal + interest |
| Convertibility |
Generally non-convertible (unless preference shares) |
Can be convertible or non-convertible, based on terms |
Equity Shares: Ideal for investors with higher risk appetite looking for growth and dividends.
Shares: Gains from selling listed equity shares after one year are considered long-term and taxed at 10% on profits exceeding ₹1 lakh annually, without the benefit of indexation. If the shares are sold within a year, the resulting short-term capital gains are taxed at a flat rate of 15%, subject to applicable conditions like STT.
Shares and debentures serve different objectives—shares offer ownership and potential growth, while debentures provide steady income with lower risk. The right choice depends on your financial goals, risk tolerance, and investment horizon. A balanced portfolio often includes both to achieve income and growth while managing risk.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
Yes, but only if they are issued as convertible debentures. These instruments give holders the option to convert their debt into equity shares of the issuing company, based on predefined terms and conversion timelines.
No. Unlike shareholders, debenture holders are creditors and do not have ownership in the company. As a result, they are not entitled to vote on company matters. Their role is limited to receiving interest payments and repayment of principal upon maturity.
Typically, yes. Debenture holders are considered creditors, and in the event of company liquidation, they are repaid before shareholders. However, the safety of a debenture also depends on whether it is secured or unsecured, and on the financial health of the issuer.
No, dividends on shares are not guaranteed. They are paid at the discretion of the company's board and depend on the company’s profitability and dividend policy. Investors in shares assume higher risk in exchange for the potential of capital appreciation and dividends.
Yes. Many companies use a hybrid capital structure by issuing both shares and debentures. This allows them to balance ownership dilution with the need for fixed-interest financing, thereby managing risk and return more effectively.