Difference Between Equity Share and Preference Share – Top 9 Factors You Must Know!

Equity shares vs preference shares.

The main objective of this article is to know the difference between equity share and preference share. But before going to the main topic, you must know what equity share and preference share mean individually!

Let’s get started!

Content:

What is Equity Share?

Equity shares are the basic or regular shares of a company, these shares are offered to the public usually to raise capital for the expansion of business. When you buy shares of a company, you become the owner of that company proportional to the value of shares.

Pro’s of Equity Shares

  • Equity Shareholders have the right to vote in crucial company decisions.
  • Equity Shareholders are eligible to receive dividends, bonus and various other benefits.

Con’s of Equity Shares

  • Dividends are not fixed, you may or may not receive them based on the decision taken by the company.
  • High risk on investment.

Types of Equity Shares

There are different types of Equity Shares:

  • Rights Share
  • Bonus Share
  • Sweat Equity Share
  • Authorized Share Capital
  • Issued Share Capital
  • Subscribed Share Capital
  • Paid up Capital

Rights Share

Rights shares are additional shares offered to the existing shareholders before the IPO. These shares are generally offered at a discounted price.

Bonus Share

Bonus shares are additional shares offered to the existing shareholders free of cost. It is generally done in a predefined ratio, consider 2:1.

Ex – If Mr. Mohan has 1000 shares of a particular company and the company decides to pay bonus shares at a ratio of 2:1, then for every 1 share Mr. Mohan owns the company will provide 2 additional shares.

The total shares Mr. Mohan owns after the declaration of bonus shares will be 1000+(2X1000)=3000 shares at no additional cost.

Sweat Equity Share

Sweat equity shares are a form of reward a company offers its employees for extraordinary performance at the workplace. 

Authorized Share Capital

Authorized Share Capital is the maximum amount of capital a company can raise by issuing shares to the public.

Example: Consider a company has an authorized share capital of Rs 10,00,000 and the price of each share is Rs 10. Therefore, the company can issue up to 1,00,000 (10,00,000/10) shares to raise the money from the public.

Issued Share Capital

Issued share capital is the total value of shares the company decides to issue out of the authorized share capital. The company can either issue complete authorized share capital or lesser than that.

Example: Out of 1,00,000 shares, if the company decides to issue only 80,000 shares, then the issues share capital will be Rs 8,00,000 (Rs 1 X 80,000) [Issued Share Capital = Face value of the share X no. of shares issued].

Subscribed Share Capital

Subscribed share capital is the number of shares subscribed by the public from the issued share capital.

Considering the same example: Out of 80,000 shares issued, only 60,000 shares were subscribed at the IPO, then Rs 6,00,000 is the subscribed share capital (Rs 10 X 60,000) [Subscribed Share Capital = Face value of the Share X Subscribed Shares]

Paid Up Capital

Paid Up Capital is the part of subscribed share capital, these are the shares that have been sold at the IPO and the company has received the payment against them.

Example: Out of 60,000 subscribed shares, 50,000 shares have been sold at the IPO, then Rs 5,00,000 is the paid up capital (Rs 10 X 50,000).

Now that we know about equity shares, there is a less risky option that is preference share, keep reading to learn about it!

What is Preference Share?

Preference shares are the types of shares that have some additional benefits over equity shares in terms of dividend sharing. When the company decides to pay dividends, the preference shareholders will be paid before the equity shareholders. Preference shareholders are also entitled to receive a fixed dividend per share.

Although, they have preferential rights over the equity shares. They have their set of Pro’s and Con’s:

Pro’s of Preference Share

  • Rate of dividend is fixed.
  • Eligible for arrears on dividend.
  • Fixed return on investment, irrespective of the company’s performance.
  • These can be converted into equity shares.
  • Less risky. 

Con’s of Preference Share

  • Preference shareholders don’t have voting rights.
  • Even if the rate of dividend increases after the purchase of shares, preference shareholders will get dividend at the pre-decided rate only. This might limit the scope of earning high returns on investment.

Types of Preference Share

Similar to equity shares, we have different types of preference shares as well.

  • Cumulative Preference Share
  • Non-Cumulative Preference Share
  • Convertible Preference Share
  • Non-Convertible Preference Share
  • Participating Preference Share
  • Non-Participating Preference Share

Cumulative Preference Share

These preference shares have the option of getting cumulative dividends year after year.
Let’s understand this with an example, say if Mr. Mohan bought 1,000 shares at Rs 10 each, his investment value would be Rs 10,000 and the company decides to pay a fixed dividend of 10% PA.

First Year – If the company pays the dividend, Mr. Mohan gets Rs 1,000 on his investment.

Second, Third, Fourth Year – If the company decides not to pay the dividends, Mr. Mohan will not get any dividend for those years.

Suppose the company decides to pay the dividend on the fifth year of investment.
Mr. Mohan will get a total of Rs 4000 [1000(2nd year)+1000(3rd year)+1000(4th year)+1000(5th year)] as dividend for the fifth year.

Non-Cumulative Preference Share

These shares don’t have the option of accumulating dividends over the years. Considering Mr. Mohan again, he will receive the dividend only on the first and fifth year, i.e. Rs 2000 [1000(1st year)+1000(5th year)].

Convertible Preference Share

These preference shares can be converted into equity shares after a fixed period of time at a specific rate. The time frame in which the preference shares can be converted into equity shares will be mentioned in the memorandum.

Non-Convertible Preference Share

Non-Convertible preference shares cannot be converted into equity shares.

Participating Preference Share

Participating preference shares have an edge over other preference shares type as they are eligible for surplus dividend sharing, in addition to the preferred dividend.

Those are additional dividends shared among the shareholders during the liquidation of the company.

Non-Participating Preference Share

They are the preference shares where the shareholders get a fixed dividend per share. They can not claim on the extra dividends at the time of liquidation of the company.

Keep reading to learn more about the difference between equity share and preference share.

Difference between equity and preference shares

We can distinguish between equity shares and preference shares with a systematic classification  

Factors Equity sharesPreference shares
DefinitionEquity shares are the regular shares of the company, which are offered to raise funds against part ownership in the company.Preference shares offer a fixed return over the course of investment. They have preferential benefits over equity shares at time of dividend payment.
Dividend payoutEquity shareholders are the last people to enjoy the dividends. The company is not obligated to pay dividends every year. Preference shareholders get the dividend prior to equity shareholders. The company is obligated to pay dividends to these shareholders. 
Rate of dividend They have a fluctuating rate of dividend based on the company’s performance in the stock market.These shareholders enjoy the dividends at a fixed rate, irrespective of the company’s performance.
Voting rightsEquity Shareholders have the voting rights in crucial decisions of the company.  Preference Shareholders do not have the voting rights in the company’s decision. 
Bonus sharesEquity Shareholders are eligible to receive bonus shares.Preference shares are not eligible for bonus shares. 
Capital repaymentEquity Shareholders are the last people to get capital repayment at the time of liquidation of the company.Preference shareholders get their capital repayment before equity shareholders.
Role in management They are part owners of the company based on the shares they own. Preference shares do not have the benefits of the management. 
Arrears They have no claim over the arrears of dividends. These shares come with a claim over the arrears of dividends. Example: Cumulative Preference Shares.
Financing termGood for long term investment.Good for mid-term and long term investment. 

Quick Summary

  • Shares can be broadly classified into two types:
    • Equity Shares
    • Preference Shares
  • Equity shares are the basic or regular shares of a company, these shares are offered to the public usually to raise capital for the expansion of business. When you buy shares of a company, you become the owner of that company proportional to the value of the shares.
  • Pros of Equity Shares: The Shareholders have the right to vote in crucial company decisions and they are eligible to receive dividends, bonuses, and various other benefits.
  • Cons of Equity Shares: The Dividends are not fixed, you may or may not receive them based on the decision taken by the company. They also come with a high risk of investment.
  • There are different types of Equity Shares:
    • Rights Share
    • Bonus Share
    • Sweat Equity Share
    • Authorized Share Capital
    • Issued Share Capital
    • Subscribed Share Capital
    • Paid-up Capital
  • Preference shares are the types of shares that have some additional benefits over equity shares in terms of dividend sharing. When the company decides to pay dividends, the preference shareholders will be paid before the equity shareholders. Preference shareholders are also entitled to receive a fixed dividend per share.
  • Pros of Preference Shares: The rate of dividend is fixed. You’re eligible for arrears on dividends and get a fixed return on investment, irrespective of the company’s performance. Of course, they can be converted into equity shares later and are less risky comparatively.
  • Cons of Preference Shares: Preference shareholders don’t have voting rights. Even if the rate of dividend increases after the purchase of shares, preference shareholders will get dividends at the pre-decided rate only. This might limit the scope of earning high returns on investment.
  • Similar to equity shares, we have different types of preference shares as well.
    • Cumulative Preference Share & Non-Cumulative Preference Share
    • Convertible Preference Share & Non-Convertible Preference Share
    • Participating Preference Share & Non-Participating Preference Share
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About Author

Vikas Yadav

Vikas Yadav is a professional writer who also happens to be an engineer. He's been creating content for quite some time now, but it was his fascination and zeal for the stock market that steered him in the right direction. He is eager to spread knowledge about the "power of investment" through his collaboration with Alice Blue by creating high-quality educational content for the public at large. If you want to comprehend difficult subjects in simple terms, he's your man.

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