Difference between Equity Share and Preference Share
November 11 2021 | Reading Time: 3 minutes
If you are someone new to the financial world, then the first thing that you should be aware of is what a share is. Share in nothing but a unit of ownership in a company. The company issues shares in order to raise capital. The share has a value in the stock exchange which is influenced by the stock market. These shares can be traded for profit-making. Naturally, if you own shares you become not just a shareholder but also become a part of the company.
Every corporate issue shares to meet their requirements. The shares they issue are mainly of two types i.e equity shares and preference shares. There are various types of shares that one can invest in. the most common ones among them are Equity shares and Preference shares. Before we dive into the difference between Equity shares and Preference shares, we shall look into what Equity and Preference shares mean.
Preference shares
When a company raises capital by issuing preference shares it is called preference shares. The shares of a company that qualifies its shareholders to receive dividends, unlike other shareholders who own common stocks. If you own a preference share, you are entitled to receive a fixed amount of dividends whenever the company runs on a profit. Even when the company is forced to shut down, the preferred shareholders have the right to ask for their money from the company’s assets.
They are considered hybrid security because they are ranked between debt and equity. Like any other shareholder, preference shareholders are also a part of the company. But, they are denied the right to vote and due to the same reason, they do not have the power to control or influence the organization’s decisions. Also, they do not have any claim over the bonus shares.
These stocks can be converted into equity shares or common stocks with or without the permission of the board of directors that cannot be traded in the stock market. In a particular year if the company decides not to offer a dividend, but they should pay it to the shareholders later.
The following are the different types of preference shares:
- Cumulative preference shares
- Non-cumulative preference shares
- Convertible preference shares
- Non-redeemable preference shares
- Redeemable preference shares
- Non-participating shares
- Participating preference shares
Equity shares
Equity shares are shares that the companies issues for raising capital. The raised money is then used for the development of the organization. Equity shares are also known as ordinary shares. These shares are the foundation of any company as it raises funds for expanding its business. When you buy the share of the company then the company is offering you its partial ownership, thus, you naturally become part of the organization’s risk.
We understood that the preferred shareholders do not have the right to vote and as a result, they do not have the power to control or influence any decision-making of the company. On the other hand, Equity shareholders do have the right to vote. These holders can claim the assets of the company. They also have the right to be a part of the crucial decision-making. They can make decisions regarding electing new leaders, acquisition, merger, etc. Equity shareholders play a crucial role in raising the capital of the institution.
The dividends that need to be paid to the shareholders depending on the company’s earnings. The company will only pay dividends once they settle all the claims and expenses. If you are someone who is considering investing for the long term, then equity investment is the most suitable and profitable form of investment. On the other hand, risks are sure to follow you. But if you stick around for a while then you can earn good returns.
Difference between Equity shares and Preference shares
Even though equity shares and preference shares are similar, they function in a very different manner and also in terms of the return the investors get especially in the case of receiving dividents. Both equity and preference shares provide different benefits for their investors. Now we will be looking more into equity and preference shares’ differences.
| Basis of Difference | Equity Shares | Preferred Shares |
| Definition | Equity shares are also known as ordinary shares. are shares that the companies issues for raising capital which is then used for the development of the organization. | Preference shares or preferred stocks are shares that provide the holders a preference over the equity shares. The preferred shareholders have the right to ask for their money from the company’s assets. |
| Dividend | The shareholders do not have the right to receive dividends. The rate of dividends can fluctuate from time to time. | The shareholders are qualified to receive dividends whenever the company runs in a profit. The rate of dividend is fixed. |
| Convertibility | The equity shares can be converted into preference shares | The preference shares can be converted to equity shares |
| Voting rights | The equity shareholders have the right to vote and can claim the assets of the company. They play a crucial part in the decision-making of the institution. | The preference shareholders do not have the right to vote and for the same reason, they do not have the power to control or influence the organization’s decisions. |
| Types | These stocks are also considered ordinary stocks so they do not have any types. | Preference shares are of different types namely, Convertible and non-convertible, Cumulative and non-cumulative, etc. |
| Liquidation | Equity shareholders have the right over the company’s assets once they complete all the pending payments. | The preferred shareholders have the first right to receive the payment after paying all the company’s creditors. |
| Participation rights | They have the right and are responsible for managing the company | They do not have participation right over the company and hence do not have any responsibility. |
| Type of Investors | These shares are more suitable for risk-taking investors | These shares are suitable for investors who are not willing to take many risks. |
Who should invest in preference shares?
If you are someone who is not willing to take up much risk or if you are new to investing, then probably you should invest in a preference share. Preference shares involve much less risk compared to equity shares. Also if you are looking for a stable return then preference share is suitable for you.
Who should invest in equity shares?
If you are someone willing to invest for a long period of time, then you should consider investing in an equity share. It involves more risks than the preference shares. Once you invest in an equity share, you then become a part of the company which means that you can participate in voting and will have a right to make decisions for the company.
Why preference shares are better than equity shares?
From a beginner’s point of view, preference share is more suitable. It involves less risk and also you can earn the return whenever the company runs in a profit.
Why do companies issue preference share?
Companies issue preference shares to raise capital but without sacrificing voting rights. This is also a way to avoid a hostile takeover.
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