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. can be of various kinds like equity share capital, preference share capital, etc.
- EquityEquityEquity refers to investor’s ownership of a company representing the amount they would receive after liquidating assets and paying off the liabilities and debts. It is the difference between the assets and liabilities shown on a company's balance sheet. and preference shares are like two sides of the coin with pros and cons. Equity DividendsDividends Of EquityDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity. depend highly on the company’s performance, while preference shares are fixed and must 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. are the real risk bearers of the company as they have the residual share in the event of liquidation.
- The preference shareholders have a preference concerning 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. and assets at the fixed dividend rate with no voting rights and the possibility of participating in dividendsDividendsDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity. when the company’s performance is good.
Table of contents
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. 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. of the owners’ money.
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..
Let us take an example,
ABC Limited issued:
- The equity share capitalEquity Share CapitalEquity Capital refers to the capital collected by a company from its owners and other shareholders in exchange for a portion of ownership in the company. 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 have preferred rights over the company’s equity shares.
Equity vs. Preference Shares Infographics
- 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. shares.
|It is the foundation capital of the company.
|These are the shares that promise the holder some preference over the company’s equity shares.
|They 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 Dividend
|The rate of the dividend fluctuates.
|The rate of a dividend is fixed.
|They have voting rights in general meetings.
|They do not have any voting rights.
|Equity shares are never mandatorily to be repaid to the investors.
|A preference share is compulsorily repayable to their investors.
|They 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.
|At 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 management
|Primarily responsible for the management of the company.
|Do not have participation rights in the control of the company.
|They cannot get converted into preference shares.
|They 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.
|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..
|They are not tradable in the market.
|They are entitled to the bonus issue against their existing holdings.
|They are not entitled to the bonus issue against their existing holdings.
|They 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.
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.
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: –