What is a Debenture?
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 later than bondholders. Debentures are different from stocks and bonds, although all three are types of investment. Below are descriptions of the different types of investment options for small investors and entrepreneurs.
Differences between Debentures And 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. The higher the risk you take, the higher the rewards you get.
Debentures are more secure than stocks, in the sense that you are guaranteed payments with high interest rates. The company pays you interest on the money you lend it 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 like to take risks for the sake of high returns, debentures are for people who want a safe and secure income.
Differences between Debentures And Bonds
Debentures and bonds are similar, but bonds are more secure than debentures. In the case of both, the company pays you a guaranteed interest that does not change in value irrespective of the fortunes of the company. However, bonds are more secure than debentures, and carry a lower interest rate. In the case of bonds, 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.
How to choose the right one?
All investments including stocks, bonds, and debentures, carry an element of risk. If you are unsure of the investment options that are best for your business, then you can ask a small business consultant who will guide you to the best investment options available to you. Investing wisely today can pay heavy dividends tomorrow. Do as much research as possible on the company you’re investing in, whether that investment is in stocks, bonds, or debentures. Research is a sure fire way to reduce risk and increase profits.