The most important difference between equity and preference shares is Equity shares grant voting rights and a share of the company’s profits through dividends or capital appreciation. Unlike equity shares, preference shares give holders a priority claim on the company’s earnings and assets.
Contents:
- What Is Preference Share?
- What Is Equity Share?
- Difference Between Equity And Preference Share
- Difference Between Equity And Preference Shares – Quick Summary
- Equity Shares Vs Preference Shares – FAQs
What Is Preference Share?
A preference share is a type of share in a company that gives its holder the right to a fixed dividend before any dividends are paid to equity shareholders. It also gives preference shareholders priority over equity shareholders in receiving the company’s assets in case of liquidation. However, preference shareholders typically do not have voting rights in the company.
There are different types of preference shares, such as cumulative, non-cumulative, redeemable, non-redeemable, participating, and convertible preference shares, each offering different rights and benefits.
For example, in the company ABC Ltd., if the dividend declared is ₹10, preference shareholders would be the first to receive this dividend. If any amount is left after paying the preference shareholders, it would be distributed among the equity shareholders.
What Is Equity Share?
Equity shares, also known as common shares, represent a portion of the ownership of a company. Equity shareholders have voting rights and are eligible to receive dividends declared by the company. However, these dividends are not fixed and depend on the company’s profits.
Equity shareholders also have the right to the company’s residual assets after the claims of creditors and preference shareholders have been satisfied in the event of liquidation. The risk involved in holding equity shares is higher than preference shares, but they also offer the potential for higher returns.
For example, a shareholder in a growing company like XYZ Ltd., who owns equity shares, may see a big increase in their capital as the company’s value increases. They may also get big dividends if the company’s profits go up. This situation shows how equity shares could be good for an investor willing to take on more risk.
Difference Between Equity And Preference Share
The main difference between equity and preference shares is that equity shares represent ownership in a company with voting rights. In contrast, preference shares have a fixed dividend preference but limited or no voting rights.
Here is a comprehensive table outlining the major differences between equity shares and preference shares:
| Parameters | Equity Shares | Preference Shares |
| Dividends | Dividends are not guaranteed and depend on the company’s profit. | Dividends are usually fixed and are paid out before equity dividends. |
| Voting Rights | Equity shareholders enjoy voting rights in company decisions. | Preference shareholders typically do not have voting rights. |
| Claim on Assets | In case of liquidation, equity shareholders are paid last. | Preference shareholders have a prior claim over assets & earnings. |
| Return Potential | Potential for higher returns due to the risk involved. | Lower risk leads to moderate but more predictable returns. |
| Risk | Higher risk as they are last in line during liquidation. | Lower risk due to priority during liquidation and fixed dividends. |
| Convertibility | Equity shares cannot be converted into other forms. | Some types of preference shares can be converted to equity shares. |
| Participation in Surplus Profits | They have a right to participate in surplus profits or any residual value. | They generally do not have the right to participate in surplus profits. |
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 And Preference Shares – Quick Summary
- The key difference between equity and preference shares is, Equity shares provide voting rights and a portion of the company’s profits via dividends or asset appreciation. On the other hand, preference shares prioritize their holders in terms of the company’s earnings and asset distribution without offering voting rights.
- A Preference Share is a type of share that holds a preferential position over equity shares in terms of payment of dividends and repayment of capital, making them a safer investment option. However, they usually do not carry voting rights.
- An Equity Share, on the other hand, represents a member’s proportionate ownership in the company, conferring voting rights, but with dividends and return of capital being subject to business performance.
- Equity shares represent ownership in a company with voting rights, whereas preference shares have a fixed dividend preference but few or no voting rights.
- In the event of liquidation, equity shareholders have a residual claim on the company’s assets after all obligations are met. In contrast, preference shareholders have a priority claim on assets and receive their investment back before equity shareholders.
Equity Shares Vs Preference Shares – FAQs
Q: What Is The Difference Between Equity Share And Preference Shares?
A: The primary distinction between equity and preference shares is that equity shares grant ownership and voting rights, while preference shares typically do not. Preference shares offer fixed dividends and a preferential claim on assets and earnings.
Q: What Are The Advantages Of Preference Share And Equity Shares?
A: Compared to equity shares, preference shares are less risky and offer a fixed dividend rate. Equity shares, while riskier, provide the potential for higher returns and include voting rights.
Q: Which Is Better Preference Shares Or Ordinary Shares?
A: An investor can choose between preference shares and ordinary shares based on how much risk they are willing to take and what their investment goals are. Ordinary shares have the potential for higher returns but have a higher risk. Preference shares have fixed returns and are less risky.
Q: What Are The Four Types Of Preference Shares?
A: The four types of preference shares are:
- Cumulative Preference Shares
- Non-Cumulative Preference Shares
- Participating Preference Shares and
- Convertible Preference Shares.
Q: How Many Types Of Equity Shares Are There?
A: The two main types of equity shares are common shares (or ordinary shares) and preference shares. Each type has unique features and benefits, catering to different investor preferences.
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