Difference between Equity Shares and Preference Shares

You all might have a basic knowledge or idea about what a share is, as the definition is in the word itself. But are you aware that every shareholder is actually a part owner of the company? Every company has its own capital structure like

  • Share capital
  • Debt funds
  • Reserves and Surplus

Share can be of different types:

  • Equity share capital
  • Preference share capital, etc.

Therefore, let us now learn and understand the basics about equity share and preference shares.

Equity shares and Preference shares

These are like two sides of a coin. They have their own advantages and disadvantages. Dividend of equity is highly dependent on the performance of the company while dividends of preference shares is fixed

Since in equity market there is high risk therefore, the equity shareholders are the real bearer of the company because they have a residual share in the liquidation of the company. Whereas, in preference shares, the shareholders have a preference with respect to higher claims on earning and the dividend rate is fixed.

Let’s take an example of Equity shares vs. Preference shares:
A company issues

  • Equity share capital of Rs. 10 crore, 1 crore shares of Rs. 10 each.
  • Preference share capital of Rs. 1 crore, 10 lakh shares of Rs. 10 each

Here, preference shareholders will be having preferred rights over the equity shareholders of the company.

Difference between equity share and preference share

Basis of differentiationEquity sharesPreference Shares
DefinitionAlso known as ordinary shares. Equity share is the foundation of the company as it raises fund. These cannot be converted to preference sharesPreference shares are the shares which promise the holder a preference over the equity shares. These can be converted to equity shares
Dividend
  • Equity shares do not have right to receive dividend
  • Under this the rate of dividend is fluctuating
  • Under preference shares, based on time, cumulative or non-cumulative are entitled for the dividend
  • Here, the rate of dividend is fixed
Voting rightsVoting rights under general meetingDo not have any voting rights
TypesThese are considered as ordinary shares and thus they do not have any typesThese come in various types like:
  • Convertible and non-convertible
  • Cumulative and non cumulative
  • Non participatory, etc.
LiquidationDuring liquidation, shareholders will have residual right over the asset even after the repayment to preference shares of the companyThe shareholders will have first right after the repayment
Participation rightsThey are primarily responsible for the management of the companyDo not have any participation rights in the company's management

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