Equity shares represent the ownership of a company. At the same time, preference shares have preferential rights to the company’s profits and assets. Also, the significant difference between equity and preference shares is the voting rights and claim over the company’s dividends and investments. Equity shareholders enjoy voting rights, while preference shareholders enjoy preferential claims over the company’s profits and assets.
In This article, We’ll Learn the differences between equity and preference shares.
What are Equity Shares?
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What are Preference Shares?
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Difference between Preference Shares and Equity Shares:
| Basis | Equity Shares | Preference Shares |
|---|---|---|
| Definition | Equity shares represent shareholders’ ownership, and one can redeem the invested amount only at the time of winding up. | Preference shareholders carry preferential rights regarding receiving dividends, profits, etc. |
| Dividend rate | The dividend rate fluctuates as per the earnings of the company. | The dividend rate is fixed in the case of preference shares. |
| Bonus shares | Equity shareholders are entitled to bonus shares. | Preference shareholders are not entitled to bonus shares. |
| Convertibility | Equity shares cannot be converted into preference shares. | Preference shares can be converted into equity shares |
| Redemption | Equity shares cannot be redeemed | Preference shares can be redeemed after the fixed period |
| Voting rights | Equity shareholders carry voting rights and can participate in the company’s decisions. | Preference shareholders carry a preferential right. |
| Types of Shares | The different types of Preference Shares are as follows: 1.Cumulative Preference Shares 2.Participating Preference Shares 3.Redeemable Preference Shares 4.Convertible Preference Shares 5.Non-Cumulative Preference Shares 6.Non-Participating Preference Shares 7.Non-Redeemable Preference Shares 8.Non-Convertible Preference Shares | The different types of Equity Shares are as follows: 1.Authorized Share Capital 2.Issued Share Capital 3.Subscribed Share Capital 4.Paid-up Share Capital 5.Rights Share 6.Bonus Share 7.Sweat Equity Share |
| Claim for assets | Do not have any right to claim for the asset when winding up. | Have a right to claim for the asset at the time of winding up |
| Capital repayment | When the company closes, the equity shares are repaid at the end. | Preference shares are reimbursed before the equity shares. |
| Payment of dividend | Equity shareholders will get dividends after preference shareholders. | Preference shareholders have a preference over equity shareholders in terms of dividends. |
| Appeal for investors | Equity Shares are appealing purchases for adventurous investors. | Preference Shares are appealing purchases for conservative investors. |
| Market Value of Shares | The value of equity shares fluctuates. | The value of preference shares does not fluctuate. |
| Risk Involved | High risk is involved in terms of return and repayment. | Low risk is involved in terms of return and repayment. |
Based on the difference between equity shares and preference shares, it can be said that both shareholders benefit in different ways. While equity shareholders enjoy voting right and can partake in company-oriented decisions, preference shareholders have the upper hand in distributing dividends.
Similarly, risk-averse individuals would find preference shares to be a more convenient investment option than equity shares with a higher risk factor. On the other hand, from the perspective of a company owner, equity shares serve as a long-term financing tool. Also, it has a lower financial obligation to shareholders when compared to preference shares.
Hence, investors can select the most suitable investment option from equity vs. preference shares depending on one’s risk-taking capacity and financial goals. Regardless, market knowledge should be given more priority regarding investment.
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