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 which can help in growing your wealth. In this blog, let’s understand equity and preference shares and their basic differences.
What are Equity Shares?
Equity shares are ordinary stocks issued by a company for the purpose of raising capital to expand their business. Investors who purchase equity share units get partial ownership of the company. The number of equity shares an investor buys is their portion of ownership in the company. As equity shares are non-redeemable, they act as a long-term source of financing for companies.
By investing in equity shares, you can get benefits such as dividends and capital appreciation. However, dividends are not fixed and keep fluctuating. If a company earns more profit, then the shareholders receive more profit and vice versa. Apart from voting rights, equity shareholders also enjoy the right to vote when it comes to deciding on critical matters of the company. These stocks can be traded in the market through stock exchanges.
Here is a list of different types of equity shares:
- Authorised Share Capital
- Bonus Shares
- Issued Share Capital
- Sweat Equity Shares
- Subscribed Share Capital
- Right Shares
- Paid up Capital
What are Preference Shares?
Preference shares are those which offer shareholders fixed dividends. Preferred shareholders are given their dividends before equity shareholders receive theirs. However, preference shareholders do not get the right to vote or participate in decision-making events of the company. In terms of priority and repayment of capital, preference shares can be ranked between debt and equity.
Companies issue preference shares for raising capital. There is a specific type of preference stock that receives arrears of dividends. In case of bankruptcy, preferred shareholders get priority over common shareholders and receive the company's assets before them. At any point in time, you can convert your preference shares into equity shares.
Below is a list highlighting the different types of preference shares:
- Convertible Preference Shares
- Non-Convertible Shares
- Non-Cumulative Preference Shares
- Cumulative Preference Shares
- Non-Redeemable Preference Shares
- Redeemable Preference Shares
- Participating Preference Shares
- Non-Participating Preference Shares
Key Differences Between Equity Shares and Preference Shares
Let us check out the major differences between equity shares and preference shares:
| Basis of Comparison | Equity Shares | Preference Shares |
| Definition | Equity shares are ordinary shares of a company that represent ownership of the company. | Preference shares are ones that carry preferential rights in terms of dividend payment and repayment of capital. |
| Rate of Dividends | In the case of equity shares, the dividend rate is not fixed. The board of directors decide dividend rates for equity shareholders after analysing the company's performance in the past financial year. | Preference shareholders receive dividends at a fixed rate predefined at a standard share price value. |
| Bonus Shares | Equity shareholders are entitled to receive bonus stocks from the company. | Preference shareholders are not entitled to receive bonus shares. |
| Voting Rights | Equity shareholders enjoy the right to vote and participate in the company's decision-making process. | Preference shareholders do not have voting rights. |
| Redemption | Equity stocks cannot be redeemed throughout the company’s lifetime. | Preference shares can be redeemed after a certain period or after the company successfully achieves desired goals. |
| Capital Repayment | Equity shareholders receive capital repayment at the time of liquidation of the company and are the last ones to receive it. | Preference shareholders receive their capital repayment before equity shareholders. |
| Risk | Equity shareholders are at high risk in comparison to preference shares. | In comparison to equity shareholders, the risk is low in the case of preference shareholders. |
| Role in Management | Equity shareholders are part owners and have the right to participate in company management. | Preference shareholders do not enjoy any advantage in terms of role in management. |
| Convertibility | Equity shares cannot be converted into preference shares. | Preference shares are convertible and can be converted into equity shares. |
| Cost | Lower costs of equity shares make them easily accessible to any investor, specifically small investors. | The price range of preference shares is higher, making them accessible only to medium and large investors. |
| Arrears of Dividend | Equity shareholders cannot claim arrears of dividends. | Preference shareholders can avail arrears of dividends along with dividends of the current year. |
| Capitalisation | In the case of equity shares, there is a high chance of over-capitalisation. | Preference shares have a relatively lesser chance of over-capitalisation. |
| Financing Terms | Equity shares serve as means for long-term financing. | Preference shares serve as means for mid-term and long-term financing. |
| Investment Denomination | Equity shares have lower denominations. | Most preference shares come with high denominations. |
| Mandate to Issue | It is mandatory for companies to issue equity share capital. | It is not mandatory for every company to issue preference share capital. |
| Financing Burden | Payment of equity dividends is optional and depends on the company's profit. | Payment of preferred dividends is an obligation for the company. |
Final Word
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.
Quick Summary
Investors can choose between equity and preference shares to grow wealth. Equity shares provide ownership and voting rights, while preference shares offer fixed dividends and priority in capital repayment. They differ in dividend rates, voting rights, redemption, risk, and convertibility. Investors should consider their risk tolerance and financial objectives when deciding between the two types of shares.
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