Debentures: Find out what they are and how to invest step by step!

Do you know what debentures are? Fixed income can yield much more than you imagine when investing in this private debt security. Check out everything you need to know to embark on this financial investment.

Initially, debentures are debt securities issued by companies with the aim of attracting medium to long-term capital. In fact, the investment has become popular, mainly among moderate to bold investors.

So, if you are looking for a long-term investment with a good return, keep reading. Here is a preview of what we have prepared for you:

• What are debentures?
• How do debentures work?
• What are the types of debentures?
• What is the yield like?
• What are the risks?
• What are the advantages?
• How to choose the best debentures?
• How to invest in debentures step by step?

What are debentures?

These are debts issued by companies to attract liquidity, and investors can profit from fixed interest rates for a set period of time. They seem simple at first, but we can delve deeper.

Debentures are fixed income investments, as we said, and their main objective is to avoid resorting to bank loans or the Stock Exchange. The interest paid on debentures is lower than the interest paid to banks, so financially it makes more sense for the company to issue debentures and raise capital this way.

This also applies to the sale of shares on the Stock Exchange, since for many companies it would not be ideal to go public and sell a large part of it.

And looking at it from the investor's point of view, this type of investment is at the top of the list of options for those who want to diversify their investment portfolio with something that is not as volatile as the stock market, but that still provides a respectable return.

There is not just one type of debenture, and don't worry, we will discuss the different types below.

How do debentures work?

As we said, debentures are debts sold to investors in exchange for a return in the form of interest.

And it works like this: the company, a publicly or privately held corporation, needs money to finance various expansion projects. To do this, it decides to issue debentures, which are cheaper than the other alternatives.

The next step is to hold a general meeting of shareholders to establish all the conditions of the debentures. However, in publicly-held companies, the Board of Directors can decide on the bonds without consulting the shareholders, and carry out the entire process at the CVM (Brazilian Securities and Exchange Commission).

Therefore, the company that wishes to issue debentures must be a corporation, or SA. To carry out the public offering of debentures, the company must necessarily be publicly traded.

Then, the investor, whether an individual or a legal entity, can invest in these debentures, which can vary greatly in price, at a stockbroker. Sometimes, the amount required to invest is large, 5,000 or 10,000 reais, but nowadays it is easy to find debentures for just 1,000 reais.

And the last part is the result of the debt term and the remuneration with the interest on the debentures. Basically, if you invested 1000 reais at a rate of 10% per year, after one year you will have 1100 reais. Pretty simple so far; but before taking any action, let's understand what the different types of debentures are.

What are the types of debentures?

Debentures are divided into several different types, depending on how payment is established, the income tax exemption and the possibility of converting interest into company shares.

They are: incentivized, convertible, simple or non-convertible debentures and exchangeable debentures. Each type brings different advantages or risks, so choosing which one to invest in is very important. Let's see:

• Simple debentures: The return on these securities is made in a simplified manner, counting on the invested capital plus interest in current currency. They are also called non-convertible because they cannot be converted into company shares;
• Convertible debentures: In this credit title, there is the possibility of converting the debentures into company shares instead of paying interest;
• Common debentures: do not have tax exemption for income tax;
• Incentivized debentures: These are exempt from income tax because they are debentures issued by an infrastructure company. To encourage the development and financing of infrastructure projects, the government exempts income to make this investment more attractive;
• Exchangeable debentures: These securities allow investors to exchange their debt securities for shares. They can be from the same company or from other companies. Therefore, it is important to carefully check the rules and conditions when applying.

What is the yield like?

Now that you know the types of debentures that exist, learn how they are divided and how the yield of each one works. How are they considered fixed income investments, follow the same logic when we talk about income, and these are:

• Prefixed income: the yield follows an interest rate already defined at the time of purchase, and thus it is possible to know exactly the value of the security at its maturity;
• Post-fixed income: instead of interest rates being defined in advance, they have their interest rate linked to some indicator (normally the IPCA or the CDI), and their yield will vary according to the variation of this indicator;
• Hybrid yields: Hybrid yield debentures have fixed rates and rates linked to an indicator as well. In this way, the yield will be a rate plus an indicator, ensuring that these bonds always have a yield higher than inflation.

What are the risks?

The risks associated with debentures usually arise from the risk of default in the event of the company's insolvency. It is very important for the investor to thoroughly research the company issuing the bonds to find out what their credit situation is.

There is a possibility that a company may issue a debt security and then not honor its commitment to pay the debentures. This is the risk of debentures: the possibility of the investor being defaulted on by the company.

In this sense, there is also the risk that the company issuing the debentures is involved in some legal problem, such as an intervention, a bankruptcy request or an insolvency process.

It is important to note that this type of investment is not protected by the Credit Guarantee Fund (FGC). Therefore, debentures are a slightly riskier investment than other types of fixed income.

What are the advantages?

By eliminating risk, debentures behave like any other fixed-income investment, but with better returns. Risk is precisely what makes returns more attractive.

There are two major advantages to debentures: again, the above average income for fixed income investments; but also, the possibility of diversifying quite your portfolio.

Debentures come in many types of securities, terms, types of income and guarantees, and offer so many options that diversifying your fixed income investment portfolio is very viable.

How to choose the best debentures?

Choosing the best debenture depends largely on the investor's objective. With so many options regarding term, payment method and the option of being exempt from income tax, the final decision really lies with the investor. best debentures are those where, after research, returns and risks are balanced.

Select debentures from consolidated companies

When choosing, we should always be aware of the risk of default. A good option comes from solid companies. Therefore, select a company that is not in difficulty or that is part of a sector that is going through a crisis.

Research the company's debts

Research the debts of the company issuing the debentures: a company with too much debt may end up going bankrupt.

Find out about the organization's activities and financial balance

The best tip for choosing debentures is to find out the core business of the issuing company, its financial balance sheet and how the company intends to use the money raised by the bonds.

Once this research is done, companies that appear to be more solid are generally the best options, even if the debentures yield less or have longer terms.

How to invest in debentures step by step

To invest in debentures, you need to go through a quick and simple process. All the investor needs to do is have an account with a brokerage firm or investment bank that trades these securities.

Then, simply access the fixed income page on the broker's website or app and search for available debentures. Each broker has a different layout, but practically all of them have the option to search or filter the assets you want to invest in.

Basically there are three steps:

1. Create an account with a stockbroker;
2. Access the fixed income section of the brokerage firm of your choice, or search for debentures with search and filter options;
3. Research carefully which debenture to choose, the company's balance sheet, how it will use the money raised, etc., and finally, purchase the asset.

To make a good deal, consider the size of the companies, their credit situation, the remuneration offered on the debenture and the types of securities, and we can already get an idea of how diversified this market is.

In short, debentures are an excellent option for those who want to diversify their portfolio, but do not want to give up a good return. Investing in debentures is very easy, and it is easy to understand how they work.

Consider which option fits your profile

This type of investment is therefore an excellent option for those who do not yet want to enter the variable investment market. When choosing, consider which option best fits your profile. The debenture options are so varied that some assets will certainly be suitable for your investment preferences.

Conclusion

Based on what has been presented, the ease of this investment is a strong point. All you need to do is have an account with a brokerage firm and look for the investment. Of course, due research is highly recommended and this step should never be skipped.

Investors who are more risk-averse may not like this option at first, precisely for this reason, but it's nothing that a good amount of research into the issuing company can't solve. The main risk is that the company may go bankrupt, become insolvent or have legal problems: things that are relatively easy to find out.

Depending on your investor profile, they are a very attractive option and can be very worthwhile. If you are a more moderate investor, with some tolerance for losses, this investment may be perfect for you.

Finally, we recommend that if you do not have the time or knowledge to do the necessary research when purchasing a debenture, that you seek professional help from an investment advisory firm.

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