The return you get depends on the amount of risk you are prepared to take. This line suits many situations that we face in our life. In the share market also the same thing is there. 

Hey guys, I am back with the third blog of the series, the share market. The securities and stocks that are traded in the share market are of different types and the return on these investments differ according to the type of security you invest in. 

The share market basically deals with three types of securities and all these have different levels of risk and returns.

1. Debentures: Debentures are nothing but the loan that is given to the company. It is given by the one who has purchased the debentures of that company. The return here is fix. The company will give you interest every year on this loan until the amount of the loan is returned. Here, the risk is the lowest. The company has to pay the interest on debentures even if the company is facing losses. But the return is also fixed. You will not get anything extra.
2. Preference shares: A company issues two types of shares, the first of which is preference shares. As the name suggests the holders of these shares have preferential rights to take the dividend. This means that if that company has earned a profit, then first it will distribute this profit to preference shares holders. But the holders of these shares do not have voting rights in the company. They cannot take part in the decision-making of the company. It is moderately risky.
3. Equity shares: The profit that is left over after distributing to the preference shareholders is distributed to equity shareholders. This means if the company has earned very little profit then equity will not get anything and if too much is left then all this is given to equity. This is highly risky. But at the same time, the holders of these shares are also the owners of the company. They have voting rights and can take part in the decision-making of the company.

Let's understand all this with an example: 

1. The company is liable to pay interest on debentures Rs. 500, and dividend on preference shares Rs. 300. The company earned a profit of Rs. 1000.

From this Rs.1000, the first Rs. 500 will go to debenture holders. The next Rs. 300 will go to preference shareholders. The company plans to save its profit for further use (retained earnings) Rs. 150. The remaining profit of Rs. 50 only can be distributed to equity shareholders. 

      2.  In the above example, let us now assume that the company has earned a profit of Rs. 5000. Now, after deducting the above amounts, the remaining profit of Rs. 4050 is for equity shareholders. 

Hope you might have understood the types of securities and the level of risk and the amount of return in the stock market. One more thing basically the shares and the stocks are the same. There is a very slight difference which does not matter much. So don't get confused.