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Difference Between Equity Share and Preference Share
Every investor aims to maximise their returns and grow wealth. However, there is no one way to do it. There are different types of shares traded in the secondary market that can help in growing your wealth. In this blog, let’s understand equity and preference shares and their basic differences.
Key Highlights:
- Equity shares offer ownership, voting rights, and higher return potential through capital appreciation.
- Preference shares provide priority in dividends and liquidation, making them suitable for investors seeking stable income.
- Understanding the differences between equity and preference shares helps investors choose the right investment based on their financial goals and risk appetite.
What are Equity Shares?
Equity shares are also referred to as ordinary or common shares. They represent a portion of ownership in a company. In other words, purchasing equity shares entitles an investor to become a shareholder in a particular company, therefore becoming a co-owner of that business.
Equity shareholders are the owners of the company and are entitled to vote at the general meeting on issues pertinent to the company’s management and policies.
On the other hand, they are the last ones to be compensated in the event of liquidation, having a claim only after all the debts to creditors and preference shareholders have been settled.
Example: Reliance Industries Ltd, Tata Consultancy Services (TCS), Infosys Ltd, HDFC Bank Ltd, ICICI Bank Ltd.
Types of Equity Shares
Companies classify their share capital into different categories based on the stage of issuance and the rights offered to shareholders. Understanding these types helps investors better interpret a company's capital structure and corporate actions.
| Type | Meaning |
| Authorised Share Capital | The maximum amount of share capital a company is legally allowed to issue, as specified in its Memorandum of Association (MoA). |
| Issued Share Capital | The portion of the authorised share capital that the company has offered to investors through IPOs, FPOs, or private placements. |
| Subscribed Share Capital | The part of the issued share capital that investors have agreed to purchase and pay for. |
| Paid-up Capital | The amount of money the company has actually received from shareholders for the subscribed shares. |
| Bonus Shares | Additional shares issued free of cost to existing shareholders from the company's accumulated reserves or profits. |
| Rights Shares | New shares offered to existing shareholders at a discounted price, allowing them to maintain their ownership stake. |
| Sweat Equity Shares | Shares issued to directors or employees in recognition of their contribution, expertise, or intellectual property, instead of cash compensation. |
What are Preference Shares?
Preference shares are a type of share that gives shareholders priority over equity shareholders when it comes to receiving dividends and repayment of capital if the company is liquidated. In return for this preference, preference shareholders generally do not have voting rights, except in certain situations specified under company law.
Preference shares combine features of both equity and debt. They usually provide a fixed dividend, making them suitable for investors seeking relatively stable income rather than high capital appreciation.
Example: Tata Steel Ltd. Redeemable Preference Shares, Mahindra & Mahindra Financial Services Ltd. Preference Shares, Power Finance Corporation (PFC) Preference Shares.
Types of Preference Shares
Preference shares come in different types based on dividend rights, redemption terms, conversion options, and profit-sharing features. Each type offers different benefits to investors depending on their investment goals.
| Type | Meaning |
| Cumulative Preference Shares | Unpaid dividends accumulate and must be paid before dividends are given to equity shareholders. |
| Non-Cumulative Preference Shares | If a dividend is not declared in a year, it is lost and cannot be claimed later. |
| Convertible Preference Shares | Can be converted into equity shares after a specified period or on certain conditions. |
| Non-Convertible Preference Shares | Cannot be converted into equity shares and continue as preference shares until redemption. |
| Redeemable Preference Shares | Can be repurchased by the company after a specified period or on agreed terms. |
| Non-Redeemable Preference Shares | Cannot be redeemed during the company's lifetime and are generally repaid only on liquidation. |
| Participating Preference Shares | Receive a fixed dividend and may also share in additional profits after equity shareholders receive dividends. |
| Non-Participating Preference Shares | Receive only the fixed dividend and do not participate in additional profits. |
Differences Between Equity Shares and Preference Shares
Although both equity and preference shares represent ownership in a company, they differ in terms of voting rights, dividend payments, risk, and repayment priority. Understanding these differences can help investors choose the type of share that best suits their investment objectives.
| Basis | Equity Shares | Preference Shares |
| Ownership | Represent ownership in the company. | Represent partial ownership with preferential rights. |
| Dividend | Dividend is variable and not guaranteed. | Usually receive a fixed dividend before equity shareholders. |
| Voting Rights | Carry voting rights on company matters. | Generally do not have voting rights (except in certain cases). |
| Priority in Liquidation | Paid after creditors and preference shareholders. | Paid before equity shareholders during liquidation. |
| Risk | Higher risk due to variable returns. | Lower risk because of preferential rights. |
| Return Potential | Higher potential for capital appreciation. | Limited return, mainly through fixed dividends. |
| Convertibility | Cannot be converted into preference shares. | Some preference shares can be converted into equity shares. |
| Suitable For | Investors seeking long-term growth and higher returns. | Investors looking for stable income with relatively lower risk. |
Conclusion
If you analyse the differences between equity stocks and preference stocks, you will see that both of them offer benefits in different ways. Make sure to select the most suitable investment option depending on your risk capacity and financial goals.
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