Equity Shares vs Preference Shares

Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

Difference Between Equity and Preference Shares

Equity shares are the ordinary/common stock of the company that is required to be issued mandatorily by the companies. They give investors the right to vote and participate in the company meetings. In contrast, preference share capital carries preferential rights over the equity share capital in terms of receiving dividends and repayment of the amount invested if the company is liquidated. Preference shareholders are not entitled to vote and participate in the company’s meetings.

The corporate world has capital structures like share capital, debt fund, reserves, and surplus. Every corporate mandatorily needs 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.

What is Equity Share Capital?

The equity share capital is the basic share capital that every company must issue mandatorily. Equity shareholders are the residual interest holder of the company assets. Equity shares are also termed 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 structureCapital StructureCapital Structure is the composition of company’s sources of funds, which is a mix of owner’s capital (equity) and loan (debt) from outsiders and is used to finance its overall operations and investment activities.read more of the owners’ money.

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What is a Preference Share Capital?

Preference share capital means the shares with preference over other equity capital of the shareholder’s capital. Such share capital has discretion over the dividend and repayment at the time of liquidationLiquidationLiquidation is the process of winding up a business or a segment of the business by selling off its assets. The amount realized by this is used to pay off the creditors and all other liabilities of the business in a specific order.read more.

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Let us take an example,

ABC Limited issued:

Here, preference shareholders will have preferred rights over the company’s equity shares.

Equity vs. Preference Shares Infographics

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Key Differences

  • Equity shares are the ordinary common stock of the company, while preference shares have specific preferential rights over the company’s equity shares.
  • An equity share does not have the right to receive dividends compulsorily. Based on their type of issue, preference shares receive dividends yearly.
  • Equity shares have voting rights in the company’s general meeting, while others do not have a voting right in a public forum.
  • Equity shares have the right to participate in the company’s management. At the same time, the preference share is not entitled to participate in the company’s management.
  • For the company, it is compulsory to repay the funds to the holders of preference shares, 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, medium or large investors invest their funds, while even small shareholders can afford to invest in equityInvest In EquityEquity investment is the amount pooled in by the investors in the shares of the companies listed on the stock exchange for trading. The shareholders make gain from such holdings in the form of returns or increase in stock value.read more shares.

Comparative Table

BasisEquity SharesPreference Shares
DefineIt is the foundation capital of the company.These are the shares that promise the holder some preference over the company’s equity shares.
DividendThey do not have a mandatory right to receive a dividend.Based on their type of non-cumulative or cumulative, these shares are entitled to dividends.
Rate of DividendThe rate of the dividend fluctuates.The rate of a dividend is fixed.
VotingThey have voting rights in general meetings.They do not have any voting rights.
Compulsory RepaymentEquity shares are never mandatorily to be repaid to the investors.A preference share is compulsorily repayable to their investors.
TypesThey do not have any type; therefore, they are considered ordinary stock.They have various types like the convertible, non-convertible, cumulative, non-cumulative, participatory, non-participatory, etc.
LiquidationAt the time of liquidation, equity shareholders have a residual right over the company’s assets even after repayment to preference shares of the company.Preference shareholders have the first right after repayment of all employee payments, statutory payments, and all kinds of secured and unsecured creditors.
Participation in managementPrimarily responsible for the management of the company.Do not have participation rights in the control of the company.
ConversionThey cannot get converted into preference shares.They can get converted into equity shares.
Compulsory to issueEquity share capital is mandatory to be issued by every company.The preference share capital is not mandatory for all the companies to issue.
TradableThese 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 more.They are not tradable in the market.
Bonus SharesThey are entitled to the bonus issue against their existing holdings.They are not entitled to the bonus issue against their existing holdings.
DenominationThey are generally of smaller denomination; hence even small investors can invest in them.They are generally of high denomination; hence medium and large investors can afford to invest in the preference share capital.

Conclusion

Investors need to understand the various forms of investments, as it is highly probable to suffer losses due to unfair trade. When 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, which 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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This article is a guide to Equity Shares vs. Preference Shares. We discuss the top differences between equity and preference share using infographics and a comparison table. You may also look at the following articles: –

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Comments

  1. Neeraj Mittal says

    Very useful difference…

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