15 Major Differences Between Equity and Preference Shares

15 Major Differences Between Equity and Preference Shares

Several newbie investors enter the stock market to gain practical knowledge and to multiply their money. However, they come to a variety of jargon and wonders and equity shares VS preference shares are one of them.
Equity shares and preference shares might sound similar, but they are different from each other. The primary difference between both these shares is the way shareholders receive their dividends.
However, both equity shares and preference shares have different benefits to investors. This article will help you understand the major difference between these shares in detail.

Equity shares are called ordinary shares of the company offered to the investors to raise capital and expand their business.
The holder of these shares are the real owners of the company, i.e. the number of shares bought by investors is the portion of their ownership in the company.
They hold equity shares and have the right to vote in a company to raise long-term capital. The equity shareholders receive profit in the form of a dividend.
However, the dividend is not fixed because there is fluctuation in the profit. If a company accumulates more profit, the shareholders will receive more profit and vice versa.

    There are different types of equity shares listed below:

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

Preference shares are those shares in which a fixed dividend is given to shareholders before paying to the equity shareholders.
Preference shares have some additional benefits in terms of dividend sharing compared to equity shares. They do not have any right to vote or to take part in any event of the company.
However, when it comes to bankruptcy, the preferred shareholders will get their dividend before the company’s property.

    There are different types of preference shares listed below:

  • Authorized Share Capital
  • Convertible Shares
  • Non-Convertible Shares
  • Redeemable Preference Shares
  • Cumulative Preference Shares
  • Non- Cumulative Preference Shares
  • Non-Redeemable Preference Shares
  • Participating Shares
  • Non-Participating Preference Shares
  • The rate of dividend
  • The paying rate for dividends is not fixed while paying to equity shareholders. In contrast, preference shareholders receive dividends at a fixed rate predefined at the standard value of the share price.
    The Board of Directors decides the dividend rate for equity shareholders after judging the company’s performance in the past financial year.

  • Voting Rights
  • Equity shareholders have the right to vote in taking crucial decisions of the company. On the other hand, preference shareholders do not have the voting right in the company’s decision.

  • Capital Repayment
  • Equity shareholders get capital repayment at the time of liquidation of the company and considered the last people to repay. In comparison, preference shareholders get capital repayment before delivering it to equity shareholders.

  • Liquidation
  • When it comes to the event of liquidation, the preference shareholders have the opportunity to receive all forms of payment after paying to the company’s creditors.
    Equity shareholders have all the rights on the company’s assets once all the pending payments are completed successfully.

  • Bonus Shares
  • Equity shareholders are eligible to receive bonus shares from the company, whereas preference shareholders are not eligible to receive bonus shares.

  • Role in Management
  • Equity shareholders are called part owners of the company based on the shares they own. On the other hand, preference shares do not have any advantage in terms of role in management.

  • Capitalization
  • Equity shares have higher chances for over-capitalization, whereas preference shares have lesser options for over-capitalization.

  • Cost
  • The low cost of equity shares makes them easily accessible in the hand of small investors. On the other hand, preference shares come with higher price tags, making them accessible in the hands of medium to large investors.

  • Bankruptcy
  • Equity shareholders get paid after fully paying preference shares. In contrast, preference shareholders have full preferential rights to receive capital before paying to equity shareholders.

  • Risk Exposure
  • Equity shareholders have a high risk of exposure because of the market’s volatility and the company’s performance. At the same time, preference shares do not pose any threat and are safer than equity shares.

  • Arrears
  • Equity shareholders have no claim over the arrears of the dividends, whereas preference shares claim over the arrears of the dividends.

  • Redemption
  • Equity shares do not come under redemption till the lifetime presence of the company. On the other hand, preference shares can be redeemed after a certain period or after achieving the desired goal successfully.

  • Denomination
  • Equity shares mostly have a lower denomination, whereas preference shares have a higher denomination.

  • Financing Term
  • Equity shares serve as a means of long-term financing, whereas preference shares serve as a means of midterm and long-term financing.

  • Financial Burden
  • The payment of equity dividends is optional as it entirely depends on the company’s profit and does not provide any fixed financial commitment. On the other hand, preference shareholders receive a fixed payment of dividends and financial obligation from the company.

  • How much is the risk exposure in equity shares and preference shares?
  • Equity shareholders have a high risk of exposure because of the market’s volatility and the company’s performance. At the same time, preference shares do not pose any threat and are safer than equity shares.

  • What is Equity Shares?
  • Equity shares are called ordinary shares of the company offered to the investors to raise capital and expand their business.

  • What is the role of equity shareholders and preference shareholders in management?
  • Equity shareholders are called part owners of the company based on the shares they own. On the other hand, preference shares do not have any advantage in terms of role in management.

  • Which shareholders are eligible to receive bonus shares from the company?
  • Equity shareholders are eligible to receive bonus shares from the company, whereas preference shareholders are not eligible to receive bonus shares.