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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 differentiation | Equity shares | Preference Shares |
|---|---|---|
| Definition | Also known as ordinary shares. Equity share is the foundation of the company as it raises fund. These cannot be converted to preference shares | Preference shares are the shares which promise the holder a preference over the equity shares. These can be converted to equity shares |
| Dividend |
|
|
| Voting rights | Voting rights under general meeting | Do not have any voting rights |
| Types | These are considered as ordinary shares and thus they do not have any types | These come in various types like:
|
| Liquidation | During liquidation, shareholders will have residual right over the asset even after the repayment to preference shares of the company | The shareholders will have first right after the repayment |
| Participation rights | They are primarily responsible for the management of the company | Do not have any participation rights in the company's management |
Thus, an investor requires complete knowledge about various forms of investments, as investing comes with high risks. Investment golden rule says acquire the share or stock when the prices are down and sell them when prices are high. Also, opting for a long term investment gives return for longer period. Knowledge of investment can bring huge profits.
