All of us come across these shares & debentures either in news or in our daily work. But many of us dont know the basic difference between these terms or even what they mean. Let me give a short description on these & their types.
A debenture is an unsecured loan you offer to a company. The company does not give any collateral for the debenture, but pays a higher rate of interest to its creditors. In case of bankruptcy or financial difficulties, the debenture holders are paid after the bondholders. Debentures are different from stocks and bonds, although all three are types of investment. Let us discuss about different types of investment options for small investors and entrepreneurs.
Stocks: When you buy stocks, you become one of the owners of the company. Your fortunes rise and fall with that of the company. If the stocks of the company soar in value, your investment pays off high dividends, but if the stocks decrease in value, the investments are low paying. Higher the risk you take, higher the rewards you get.
Debentures are more secure than stocks, in the sense that you are guaranteed payments with high interest rates. You are paid an interest on the money you lend the company until the maturity period, after which whatever you invested in the company is paid back to you. The interest is the profit you make from debentures. While stocks are for those who are willing to take risks for the sake of high returns, debentures are for people who want a safe and secure income.
Bonds are more secure than debentures. In case of both, you are paid a guaranteed interest that does not change in value irrespective of the fortunes of the company. However, bonds are more secure than debentures, but carry a lower interest rate. The company provides collateral for the loan. Moreover, in case of liquidation, bondholders will be paid off before debenture holders.
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.
So people, keep in mind these few things whenever you are planning to invest in any company, the further classification would be their in the upcoming blogs.