A debenture is an unsecured loan you offer to a company. The company does not give any collateral for the debtor, but pays a higher rate of interest to its creditors. In case of bankruptcy or financial difficulties, the debtors holders are paid later than 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.
Debentures vs. 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 debts. While stocks are for those who like playing the field, and are willing to take risks for the sake of high returns, debts are for people who want a safe and secure income.
Debentures vs. Bonds:
Debentures and bonds are similar except for one difference – 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 debts, 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 debture 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 debtholders holders.
All investment, including stocks bonds or debts carry an element of risk. If you are unsure of the investment options that are best for your business, then you can consult a small business consultant who will guide you to the best investment options available to you. Investing wisely today can pay heavy dividends tomorrow.