The primary difference between equity and preference shares is that equity shareholders have voting rights in the company, while preference shareholders do not. Preference shareholders receive fixed dividends, whereas equity shareholders benefit from variable dividends based on company profits.
What Are Equity Shares?
Equity shares are units of ownership in a company, giving shareholders the right to vote on major decisions. These shares entitle holders to dividends, which are dependent on the company’s profits, but there is no fixed dividend rate for equity shareholders.
Equity shares are traded on stock exchanges, and their value fluctuates based on the company’s market performance. Shareholders benefit from capital gains when the company’s stock price rises. However, they carry higher risk compared to other types of shares, as dividends are not guaranteed and depend on the company’s profitability.
What Are Preference Shares?
Preference shares are a type of share that guarantees shareholders fixed dividends, which are paid before any dividends to equity shareholders. Unlike equity shareholders, preference shareholders do not have voting rights, but they benefit from more stable and predictable returns.
Preference shareholders have priority over equity shareholders in receiving dividends and during the liquidation of company assets. While they offer lower risk due to fixed dividends, they typically do not benefit from capital gains as much as equity shareholders do. Preference shares are suitable for investors seeking more stable and predictable income.
Equity Shares Vs Preference Shares
The main difference between equity shares and preference shares is that equity shareholders have voting rights in the company, while preference shareholders do not. More such differences are summarised below:
| Criteria | Equity Shares | Preference Shares |
| Voting Rights | Equity shareholders have voting rights. | Preference shareholders do not have voting rights. |
| Dividend | Dividends depend on company profits. | Fixed dividends are provided. |
| Risk | Higher risk due to market fluctuations. | Lower risk due to fixed dividends. |
| Priority in Dividends | Paid after preference shareholders. | Paid before equity shareholders. |
| Capital Appreciation | Benefit from capital gains when share prices rise. | Limited capital gains; focus on fixed income. |
Features Of Equity Shares
The main feature of equity shares is that they represent partial ownership in the company, giving shareholders the right to vote on key company matters and decisions. Other features are as follows:
- Ownership Rights: Equity shares represent ownership in the company. This gives shareholders a proportionate claim on the company’s assets and earnings, and they can influence key decisions through voting rights based on the number of shares they hold.
- Voting Rights: Equity shareholders have voting rights in crucial decisions like appointing directors and approving significant corporate policies. The influence of their vote depends on the number of shares they own, directly impacting the governance of the company.
- Capital Appreciation: One of the advantages of equity shares is the potential for capital gains. If the company performs well, the value of the shares may increase, offering shareholders a chance to profit by selling their shares at a higher price than they purchased.
- Dividend Entitlement: Equity shareholders are entitled to dividends, but these are not fixed. The dividends depend on the profitability of the company and are distributed after preference shareholders, making it a variable return based on company performance.
- Higher Risk: Equity shares carry more risk than other forms of shares. Shareholders may lose their investment if the company performs poorly. Unlike preference shares, equity shareholders are the last to receive returns in case of liquidation.
Features Of Preference Shares
The main feature of preference shares is that they provide shareholders with fixed dividends, which are paid out before equity shareholders receive their dividends.
- Fixed Dividend: Preference shareholders are entitled to a fixed dividend, regardless of the company’s profitability. This makes preference shares more appealing to those seeking regular income, as they are paid before equity shareholders.
- No Voting Rights: Unlike equity shareholders, preference shareholders do not have the right to vote on major company matters. This means they cannot influence decisions such as the election of directors or mergers, but they enjoy priority when it comes to dividend payments.
- Lower Risk: Preference shares are considered less risky compared to equity shares because they offer guaranteed dividend payments. While they may not benefit from capital appreciation, the regular income reduces the financial risk for preference shareholders.
- Priority in Liquidation: In the event of a company liquidation, preference shareholders are paid before equity shareholders. This higher priority means they are more likely to recover their investment than equity shareholders if the company goes bankrupt.
- Limited Capital Gains: Preference shareholders do not usually experience significant capital gains, as their returns come from fixed dividends rather than an increase in share value. As a result, preference shares are more suited to investors who prioritize steady income over potential growth.
Types Of Equity Shares
The types of equity shares can be classified based on the rights and benefits they provide to shareholders. Each type serves a different purpose for the company and the shareholders.
- Ordinary Shares
- Bonus Shares
- Rights Shares
- Sweat Equity Shares
- Voting and Non-Voting Shares
Ordinary Shares
Ordinary shares, also known as common shares, are the most common type of equity shares issued by companies. These shares grant shareholders voting rights on key corporate decisions such as electing the board of directors and approving mergers. Shareholders also receive dividends, though the dividend amount is not fixed and depends on the company’s financial performance.
For example, if an investor holds 100 ordinary shares of a company priced at ₹200 per share, and the company’s share price rises to ₹250, the value of the investment increases from ₹20,000 to ₹25,000. The investor benefits from capital appreciation and might also receive dividends based on the company’s profits, but these dividends are not guaranteed.
Bonus Shares
Bonus shares are issued by a company to its existing shareholders as a reward for their investment, typically when the company has surplus profits that it wishes to distribute without cash outflows. These shares are given at no cost, and shareholders receive them in proportion to the shares they already own.
For instance, if a company declares a 1:1 bonus issue, and an investor holds 50 shares priced at ₹100 each (₹5,000 in total), the investor would receive an additional 50 shares, making their total holding 100 shares. However, the share price would adjust post-issue, possibly reducing to ₹50 per share, keeping the overall value of the investment the same at ₹5,000.
Rights Shares
Rights shares are shares issued to existing shareholders, allowing them to purchase additional shares at a discounted price before the shares are offered to the public. This type of share issue enables shareholders to maintain their ownership percentage in the company. Rights shares are offered during a company’s capital-raising process.
For example, a company may offer rights shares at ₹80 per share when the current market price is ₹100. If an investor holds 100 shares, they may receive the right to buy an additional 20 shares at the discounted rate of ₹80 each, allowing them to buy shares below market value while increasing their total holding.
Sweat Equity Shares
Sweat equity shares are issued to employees or directors of a company in exchange for their hard work, expertise, or significant contributions to the company’s growth. These shares are typically offered at a discount or for free as a reward for their efforts, aiming to retain valuable employees and encourage further contributions.
For instance, if an employee is issued 1,000 sweat equity shares at a discounted rate of ₹50 per share when the market price is ₹100, they benefit by gaining shares at half the market value. If the share price later increases to ₹150, the employee’s 1,000 shares would now be worth ₹150,000, demonstrating a strong return on their efforts.
Voting and Non-Voting Shares
Voting shares grant shareholders the right to vote on significant corporate matters, such as electing board members and approving mergers. Non-voting shares, on the other hand, provide shareholders with the same financial benefits, such as dividends, but without the right to influence company decisions.
For example, a company may issue non-voting shares at ₹150 per share to attract investors who seek dividend income without participating in corporate governance. An investor buying 200 non-voting shares for ₹150 each would invest ₹30,000 and earn dividends if the company is profitable, but they wouldn’t have any say in company decisions.
Types Of Preference Shares
Preference shares come in different forms, each with unique features that cater to different investor needs. Types of preference shares are as follows:
- Cumulative Preference Shares
- Non-Cumulative Preference Shares
- Convertible Preference Shares
- Non-Convertible Preference Shares
- Participating Preference Shares
Cumulative Preference Shares
Cumulative preference shares ensure that if a company skips a dividend payment in one year, it accumulates and is paid out in the future before any dividends are paid to equity shareholders. This type of preference share is ideal for investors seeking more consistent returns.
For example, if a company misses a ₹10 per share dividend in one year, cumulative preference shareholders are entitled to receive that missed dividend the following year. So, if the company resumes dividends the next year, the shareholders would receive ₹20 per share (₹10 from the missed year and ₹10 for the current year).
Non-Cumulative Preference Shares
Non-cumulative preference shares do not accumulate missed dividend payments. If the company does not declare a dividend in a given year, shareholders lose the right to claim that missed dividend in the future.
For instance, if a company does not declare dividends for the current year, and the dividend rate for non-cumulative preference shares was ₹12 per share, shareholders would not receive any dividends for that year and cannot claim them later, even if the company becomes profitable again.
Convertible Preference Shares
Convertible preference shares give shareholders the option to convert their preference shares into a specified number of equity shares after a set period. This allows preference shareholders to benefit from capital appreciation if the company performs well.
For example, an investor holding 500 convertible preference shares priced at ₹100 each might be able to convert them into 250 equity shares after three years. If the equity share price has risen to ₹200 per share at the time of conversion, the investor’s 250 shares would be worth ₹50,000.
Non-Convertible Preference Shares
Non-convertible preference shares cannot be converted into equity shares. These shares provide a fixed dividend to shareholders but do not offer the opportunity to benefit from capital appreciation through equity conversion.
For instance, an investor holding 400 non-convertible preference shares at ₹90 per share would receive a fixed dividend of, say, ₹8 per share annually. The shares would remain preference shares throughout their tenure, and the investor would not be able to convert them into equity shares.
Participating Preference Shares
Participating preference shares offer shareholders additional dividends if the company performs exceptionally well, on top of the fixed dividend. This provides a way for shareholders to benefit from the company’s success while still receiving guaranteed fixed dividends.
For example, if a company issues participating preference shares with a fixed dividend of ₹10 per share and later announces additional profits, shareholders may receive an extra ₹5 per share in dividends. If an investor holds 200 shares, they would receive ₹3,000 (₹10 per share as the fixed dividend + ₹5 per share as the additional dividend).
We hope that you are clear about the topic. But there is more to learn and explore when it comes to the stock market, and hence we bring you the important topics and areas that you should know:
Difference Between Equity Share And Preference Share – Quick Summary
- The primary distinction between equity and preference shares is that equity shareholders have voting rights, while preference shareholders receive fixed dividends and no voting rights.
- Equity shares represent ownership in the company and provide dividends based on company performance.
- Preference shares provide fixed dividends and take priority over equity shares during liquidation.
- The primary difference is that equity shareholders have voting rights, while preference shareholders do not.
- The main feature of equity shares is that they grant ownership and voting rights to shareholders.
- The main feature of preference shares is the guaranteed fixed dividends before equity shareholders.
- Ordinary shares, bonus shares, rights shares, sweat equity shares, and voting/non-voting shares are the main types of equity shares.
- Cumulative preference shares, non-cumulative preference shares, convertible preference shares, non-convertible preference shares, and participating preference shares are the key types of preference shares.
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Equity Share Vs Preference Shares – FAQs
The primary difference between equity shares and preference shares is that equity shareholders have voting rights in the company, while preference shareholders receive fixed dividends but do not have voting rights. Preference shareholders get priority in dividends.
Preference shares are a type of share that guarantees fixed dividends to shareholders before any dividends are distributed to equity shareholders. They offer more stable returns but come without voting rights, making them less risky for investors seeking regular income.
Equity shares represent ownership in a company, providing shareholders with voting rights and the opportunity to earn dividends based on the company’s profits. Equity shareholders also benefit from capital appreciation if the company’s stock price increases over time.
Preference shares can be purchased by investors seeking stable, fixed returns with lower risk. These shares are ideal for individuals who prioritize regular income over capital appreciation, as preference shareholders receive dividends before equity shareholders in case of profits.
Equity shares are available for investors who seek ownership in a company and are willing to take on higher risk for the potential of capital gains. Equity shareholders benefit from market growth and have voting rights in company decisions.
No, equity shares cannot be converted into preference shares. Equity shares represent ownership with voting rights, while preference shares offer fixed dividends but do not include voting rights. Both types serve different purposes for investors.
Convertible preference shares can be converted into equity shares after a specific period or under certain conditions set by the company. This allows investors to benefit from both stable dividends and potential capital appreciation from equity shares.
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