Equity Shares vs Preference Shares Differences
The corporate world has its own 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 own 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 dividend rate is fixed, 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 which 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 of Equity shares vs Preference Shares,
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 Shares vs Preference Shares Infographics
Here we provide you with the top 13 difference between Equity Shares vs Preference Shares
Equity Shares vs Preference Shares Key Differences
The key difference between Equity Shares vs Preference Shares are as follows –
- Equity shares are the ordinary common stock of the company while preference shares are having specific preferential rights over the equity shares of the company
- Equity shares do not have the right to compulsorily receive dividend while preference shares based on their type of issue, entitled to receive the dividend every year
- Equity shares have voting right in the general meeting of the company while preference shares do not have any voting right in general meeting.
- Equity shares are having the right to participate in the management of the company while preference shares are not entitled to participation in the management of the company.
- For the company, it is compulsorily to repay back the funds to the preference shareholders while it is not mandatory to repay back the funds of equity shares
- Preference shares can get converted into equity shares while equity shared cannot get converted to preference shares
- Equity shares are entitled to the bonus shares while preference shares are 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 shareholder can also afford to invest.
Equity Shares vs Preference Shares Head to Head Difference
Let’s now look at the head to head difference between Equity Shares vs Preference Shares
|Basis – Equity vs Preference Shares||Equity Shares||Preference Shares|
|Define||Equity share is the foundation capital of the company.||Preference shares are the shares which promise the holder to have some preference over the Equity shares of the company|
|Dividend||Equity shares do not have a mandatory right to receive dividend||Preference shares based on their time of non-cumulative or cumulative, are entitled to the dividend|
|Rate of Dividend||A rate of the dividend of equity shares is fluctuating||The rate of a dividend of preference shares is fixed.|
|Voting||Equity shares have voting right in general meeting.||Preference shares do not have any voting right|
|Compulsory Repayment||Equity shares never mandatorily to be repaid back to the investors.||A preference share is compulsorily repayable to their investors|
|Types||Equity shares do not have any type, hence they are considered as the ordinary stock of the company.||Preference shares have a various type 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 kind of secured and unsecured creditors|
|Participation in management||Equity shares are primarily responsible for the management of the company||Preference shares do not have participation rights in the management of the company|
|Conversion||Equity shares cannot get converted into preference share.||Preference shares can get converted into equity shares|
|Compulsory to issue||The equity share capital is mandatory to be issued by every company||The preference share capital is not mandatory for all the company to issue|
|Tradable||Equity shares are tradable in the market through a stock exchange||Preference shares are not tradable in the market|
|Bonus Shares||Equity shares are entitled to the bonus issue against their existing holding.||Preference shares are not entitled to the bonus issue against their existing holdings|
|Denomination||Equity shares are generally of smaller denomination hence even small investors can invest in it.||Preference shares are generally of high denomination, hence medium and large investors can afford to invest in the preference share capital.|
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 or 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. This is how one can earn a handsome profit and can fulfill the target of achieving the best returns out of their profit.
This has a 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 –