Equity Shares vs Preference Shares

Difference Between Equity and Preference Shares

The key difference between Equity Shares and Preference Shares is that Equity shares are the ordinary/common stock of the company which is required to be issued mandatorily by the companies and  which gives the investors right to vote and participate in the meetings of the company whereas preference share capital carries preferential right over the equity share capital in terms of receiving dividend and repayment of their amount invested during the company goes into liquidation but preference shareholders are not entitled to vote and participate in the meetings of the company.

The corporate world has its capital structure like share capital, debt fund as well as reserves and surplus. Every corporate has mandatory to issue share capital to raise the fundamental capital for the company. Share capital can be of various kinds like equity share capital, preference share capital, etc.

Equity and preference shares are just like two sides of the coin, have their pros and cons. Dividends of equity will be highly dependent on the performance of the company while of preference shares it is fixed and is needed to be paid.

• Equity shareholders are the real risk bearer of the company as they have the residual share in the event of liquidation;
• The preference shareholders have a preference with respect to higher claims on earnings and assets, and the dividend rate is fixed, with no voting rights and the possibility for participating in dividends in times when the performance of the company is good.

What is Equity Share Capital?

The equity share capital is the basic share capital that every company has to issue mandatorily. Equity shares holders are the residual interest holder in the company assets. Equity shares are also termed as ordinary share capital belonging to the capital structure of the owners’ capital.

What is a Preference Share Capital?

Preference share capital means the shares with preference over the other equity capital of the shareholders’ capital. Such share capital is having preference over the dividend and repayment at the time of liquidation.

Let us take an example,

ABC Limited issued

• The equity share capital of $50 million, 5 million shares of $10 each;
• The preference share capital of $5 million, 500,000 shares of $10 each;

Here preference shareholders will be having preferred rights over equity shared of the company.

Equity vs. Preference Shares Infographics

Key Differences

• Equity shares are the ordinary common stock of the company, while preference shares have specific preferential rights over the equity shares of the company.
• An Equity share does not have the right to compulsorily receive dividends. Preference shares, basis their type of issue, receive the dividend every year.
• Equity shares have voting right in the general meeting of the company, while the other does not have any voting right in general meeting.
• Equity shares have the right to participate in the management of the company. At the same time, the preference share is not entitled to participate in the management of the company.
• For the company, it is compulsorily to repay the funds to the preference shareholders while it is not mandatory to repay the funds of equity shares.
• Preference shares can get converted into equity shares. At the same time, equity shares cannot get converted to preference shares.
• Equity shares are entitled to the bonus shares. While the other is not entitled to the bonus shares against their existing holding.
• In Preference shares, are medium or large investors invest their funds while in equity shares, even small shareholders can also afford to invest.

Comparative Table

Basis		Equity Shares		Preference Shares
Define		It is the foundation capital of the company.		These are the shares that promise the holder to have some preference over the Equity shares of the company.
Dividend		They do not have a mandatory right to receive a dividend.		These shares, based on their time of non-cumulative or cumulative, are entitled to the dividend.
Rate of Dividend		The rate of the dividend is fluctuating.		The rate of a dividend is fixed.
Voting		They have voting right in general meetings.		They do not have any voting rights.
Compulsory Repayment		Equity shares never mandatorily to be repaid to the investors.		A preference share is compulsorily repayable to their investors.
Types		Do not have any type; hence they are considered as the ordinary stock of the company.		Have various types like Convertible-Non convertible, Cumulative-Non cumulative, Participatory-Non Participatory, etc.
Liquidation		At the time of liquidation, Equity shareholders will have a residual right over the asset of the company even after repayment to preference shares of the company.		Preference shareholders will be having first right after repayment of all employee payments, statutory payments, and all kinds of secured and unsecured creditors.
Participation in management		Primarily responsible for the management of the company		Do not have participation rights in the management of the company.
Conversion		They cannot get converted into preference shares.		Can get converted into equity shares;
Compulsory to issue		Equity share capital is mandatory to be issued by every company;		The preference share capital is not mandatory for all the companies to issue.
Tradable		These are tradable in the market through a stock exchange.		They are not tradable in the market.
Bonus Shares		They are entitled to the bonus issue against their existing holding.		Not entitled to the bonus issue against their existing holdings.
Denomination		They are generally of smaller denomination; hence even small investors can invest in it.		They are generally of high denomination, hence medium and large investors can afford to invest in the preference share capital.

Conclusion

Investors need to gain complete knowledge about the various forms of investments, as it is highly probable of heavily suffering the losses due to wrong trade is undertaken. At the time of investing the funds, the golden rule is to acquire the shares of stock when the prices are down and sell them when the prices of shares are on the upside. Also, a real investor should go for a long-term horizon; it will give them good returns for longer periods. It is how one can earn a handsome profit and can fulfill the target of achieving the best returns out of their profit. 

Recommended Articles

This article has been a guide to Equity Shares vs. Preference Shares. Here we also discuss the top differences between Equity Shares and Preference Shares along with infographics and comparison table. You may also have a look at the following articles –

• What are Bonus Shares?
• Golden Handshake
• Stock vs Share
• Equity vs Assets – Differences