Differences Between Equity Shares and Preference Shares
Shares represent ownership in a company and are issued to raise capital. There are two primary types of shares: equity shares and preference shares. While both share types represent ownership in a company, they differ in terms of voting rights, dividend payments, and capital appreciation.
Written by
- Redaction Team
- Business Planning, Entrepreneurship
Table of Contents
What Are Equity Shares?
Equity shares, also known as common shares, represent partial ownership in a company. Equity shareholders have voting rights, allowing them to influence company decisions, such as electing directors and approving major corporate policies.
Features of Equity Shares:
Ownership in a company: Equity shareholders are considered owners of the company.
Voting Rights: Equity shareholders enjoy the right to vote on company matters.
Dividend Payments: Equity shareholders receive dividends, but these are not guaranteed and depend on company profits.
Capital Appreciation: Equity shares offer the potential for capital appreciation over time.
Risk Factor: Equity investment is riskier compared to preference shares due to market fluctuations.
Repayment of Capital: In the case of bankruptcy, equity shareholders receive dividends last, after all debts and preference shareholders are paid.
Example: A company issuing equity share capital allows investors to purchase equity and become part owners of the business.
What Are Preference Shares?
Preference shares, also known as preferred shares or preference stock, provide shareholders with preferential claims on dividends and assets over equity shareholders. Preference shareholders have priority when it comes to dividend payments and capital repayment.
Features of Preference Shares:
Fixed Dividend: Preference shareholders receive dividends at a fixed rate before equity shareholders.
No Voting Rights: Unlike equity shareholders, preference shareholders do not have voting rights.
Priority in Dividend Payments: Preference shareholders receive dividends before common shareholders.
Lower Risk: Preference shares are generally considered safer than equity shares.
Types of Preference Shares: Includes convertible, cumulative, non-cumulative, redeemable, and irredeemable preference shares.
Preference in Capital Repayment: In case of liquidation, holders of preference shares get repaid before equity shareholders.
Example: A company may issue preference shares to raise capital while ensuring that dividends are paid at a fixed rate before distributing profits to equity shareholders.
Key Differences Between Equity and Preference Shares
| Feature | Equity Shares | Preference Shares |
|---|---|---|
| Ownership | Represents ownership in a company | Represents partial ownership with fixed income |
| Voting Rights | Equity shareholders have voting rights | Preference shareholders do not have voting rights |
| Dividend Payment | Not fixed; depends on company profits | Fixed dividend rate, paid before equity shareholders |
| Risk | Higher risk due to market fluctuations | Lower risk due to fixed dividend payments |
| Capital Appreciation | Equity shareholders enjoy capital appreciation | Limited capital appreciation, focuses on dividend income |
| Repayment in Case of Bankruptcy | Paid after preference shareholders | Paid before equity shareholders |
| Types | Common shares, ordinary shares | Preferred shares, various types of preference shares |
Preference Shares vs. Equity Shares: Which One Should Investors Choose?
The choice between equity shares and preference shares depends on an investor’s risk appetite and financial goals.
When to Choose Equity Shares:
Investors seeking long-term capital appreciation.
Those who want voting rights in a company.
Individuals comfortable with higher risks in exchange for potential growth.
When to Choose Preference Shares:
Investors looking for steady, fixed dividend payments.
Those who prioritize lower risk and stable income.
Individuals who do not need voting rights but want preferential claims on profits.
Example: Investors looking for growth and influence should purchase equity shares, whereas those seeking fixed income should opt for preference shares.
Conclusion
The difference between equity shares and preference shares lies in their voting rights, dividend payments, and risk levels. Equity shareholders enjoy voting rights and capital appreciation, whereas preference shareholders enjoy preferential claims on dividends and capital repayment.
For investors, understanding equity and preference shares is crucial in making informed financial decisions. Whether you are looking for capital appreciation or fixed income, both types of shares offer unique advantages depending on your investment goals.
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