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 capitalShare CapitalShare capital refers to the funds raised by an organization by issuing the company's initial public offerings, common shares or preference stocks to the public. It appears as the owner's or shareholders' equity on the corporate balance sheet's liability side.read more 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 equityDividends Of EquityDividend is that portion of profit which is distributed to the shareholders of the company as the reward for their investment in the company and its distribution amount is decided by the board of the company and thereafter approved by the shareholders of the company.read more will be highly dependent on the performance of the company while of preference shares it is fixed and is needed to be paid.
- Equity shareholdersEquity ShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares.read more 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 earningsEarningsEarnings are usually defined as the net income of the company obtained after reducing the cost of sales, operating expenses, interest, and taxes from all the sales revenue for a specific time period. In the case of an individual, it comprises wages or salaries or other payments.read more 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 capitalOrdinary Share CapitalOrdinary Shares Capital is the amount of money that a Company receives or gives in exchange for its common shares & it is reflected under the owner’s equity in the liability side of a Balance Sheet. read more belonging to the capital structure of the owners’ capital.
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Source: Equity Shares vs Preference Shares (wallstreetmojo.com)
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
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Source: Equity Shares vs Preference Shares (wallstreetmojo.com)
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 exchangeStock ExchangeStock exchange refers to a market that facilitates the buying and selling of listed securities such as public company stocks, exchange-traded funds, debt instruments, options, etc., as per the standard regulations and guidelines—for instance, NYSE and NASDAQ.read moreStock exchange refers to a market that facilitates the buying and selling of listed securities such as public company stocks, exchange-traded funds, debt instruments, options, etc., as per the standard regulations and guidelines—for instance, NYSE and NASDAQ.read moreStock exchange refers to a market that facilitates the buying and selling of listed securities such as public company stocks, exchange-traded funds, debt instruments, options, etc., as per the standard regulations and guidelines—for instance, NYSE and NASDAQ.read more. | 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.
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Very useful difference…