Debenture stock is a form of investment that is somewhat like preferred stock. With a debenture stock offering, the terms and conditions that govern the stock issue include a schedule for making payments to the investor at regular intervals. From this perspective, debenture stock functions more like any type of debenture rather than like other forms of stock.
One of the keys to understanding how debenture stock functions is to realize that the stock offering is treated as equity rather than debt. This is the factor that tends to make the stock more like other forms of stock and less like a debenture. The classification of debenture stock also establishes a degree of protection for investors in the event the company shuts down and the assets of the corporation go through a liquidation process.
With this type of stock, investors receive payments that are issued on a specific schedule. The schedule remains in effect for as long as the investor holds on to shares of the stock. Depending on the exact terms of the purchase agreement, an investor may receive one last scheduled payment after selling the shares. However, this is not true in most cases. Normally, the next scheduled payment is issued to the new owner of the stocks.
Debenture stock carries a degree of risk, just like any type of stock issue. The advantages of the stock are the fixed payments that take place at regular intervals. This helps to ensure that the investor can anticipate a steady return on the investment at specific times throughout the calendar year. In addition, the terms that govern the return are usually liberal enough to make the stock offering to investors who wish to maintain a high degree of organization with their stocks while minimizing the opportunities for the unexpected to occur.
This type of stock does provide protection for the investor in the event that the company fails. However, it is important to note that holding the stock does not entitle the investor to receive compensation while the corporation goes through the liquidation process. In most localities, investors have to wait for Accounts Payable items to be settled before receiving any compensation for the shares in their possession. This applies to debenture stock in a manner similar to many other forms of stock. All outstanding debts are settled before payments on the stock are issued to any of the investors.
