The distinction between equity and preference shares can be confusing to a layperson. Both are investment vehicles, but they have different characteristics. Apart from voting rights and dividend distribution, equity and preference shares differ in a number of ways. The major differences between Equity Share and Preference Share have been highlighted.
- What is Equity Share?
- Types of Equity Share
- What are Preference Shares?
- Difference between Equity Share and Preference Share
- Final Thoughts
- Frequently Asked Questions
Equity shares are those that receive no preferential treatment or rights in the distribution of dividends or the repayment of capital in a firm. All non-preference shares are included in this category.
On the money they invest in a company, equity shareholders do not receive a fixed dividend. Rather, they receive a portion of a company’s distributable net profits. Only after all preference share rights have been settled does a company pay equity shares. Equity shares, unlike preference shares, are subject to the company’s performance.
Even while equity shares are listed as a liability on a company’s balance sheet, they supply the capital needed to start and run the business. We categorize equity shares as follows:
- People who are eligible to vote, or
- Differentiated voting, dividend, and other rights come with equity shares.
Preference Share Capital or Preference Shares have a predetermined dividend rate. As a result, they have an advantage over stock shares in this scenario. Preference shares, on the other hand, lack voting rights. A preference share must meet the following two characteristics by definition:
- A firm must guarantee a preferential dividend to a preference shareholder for the duration of the company’s existence.
- A preferential share has first priority over equity shares in the event of a company’s liquidation.
Retail investors are rarely given preferred shares by firms. They sell them to institutions like banks, NBFCs, and other financial organizations.
It’s also worth noting that participation preference shares come with a specified entitlement to a portion of a company’s surplus profit. If a company is limited by shares, it cannot issue irredeemable preference shares, according to Section 55 of the Companies Act, 2013.
The following are the main distinctions between equity and preference shares:
- Equity shares are also known as ordinary shares. They possess a certain percentage of the corporation. Preference shares come with certain privileges.
- Dividend: dividend payments are not prioritized for equity shareholders. Nonetheless, a company’s preference shares are always paid a dividend before its equity shares. Only until the preference shareholder dividend has been paid in full does a firm pay a dividend on equity shares.
- Dividend rate: With equity shares, the dividend rate varies depending on the company’s stock market performance and available net profit. Preference shares have a predetermined dividend rate and amount.
- Voting Rights: Equity shares come with voting rights in company matters. They have the ability to vote on any issue. Voting rights for preference shareholders are limited or nonexistent.
- Bonus Shares: Bonus shares are not offered to preference owners. Nonetheless, equity stockholders are entitled to bonus shares.
- Capital Repayment & Liquidation: When it comes to capital repayment, preference shareholders always have priority over equity shareholders.
- Long-term financial goals are best served by equity shares. Preference shares can help you achieve your financial goals in the medium to long term.
- Redemption: While equity shares cannot be redeemed, a company’s redeemable preference shares can be redeemed once a set length of time has passed.
- Arrears: A cumulative preference share accumulates and pays all unpaid dividends from previous years. A company does not pay a dividend to any equity shareholder until such arrears of dividends are paid to preference shareholders.
- Risk Factor: risk-takers prefer equity shares, while risk-averse investors prefer preference shares.
- Equity shares are issued in small denominations, such as Rs. 10/-. Preference shares have greater denominations than ordinary shares. Equity shares are an appealing investment choice for retail investors due to their low denomination.
- Financial Burden: While a firm can choose whether or not to pay dividends on its equity shares, it is required to do so for preference shares. As a result, the issuing corporation has a set payback obligation for preference shares.
We can conclude that both equity and preference shares benefit investors in different ways after understanding the differences between them. Preference shares are a more appealing investment option for low-risk individuals. More risk is connected with equity shares.
As a result, you can choose between equity and preference shares based on your risk profile, investment tenure, and financial goals.
Frequently Asked Questions
No, only equity shareholders have such rights in a company’s management. Preference shareholders do not have control over the company.
The main distinctions between a share and a debenture are voting rights and repayment preference. Every equity share confers ownership and voting rights in the company. Debentures always have a set payback rate.
There are no voting rights for preference shareholders. They sometimes have limited voting rights.
No, bonus shares of a corporation are only available to equity shareholders.