What are the differences between Equity Shares and Preference Shares?

What are the differences between Equity Shares and Preference Shares?

A number of financial terms are used when you first start your investment journey. Understanding these concepts is essential for making better decisions and ensuring a smooth investing process. Equity shares and preference shares are two examples of such concepts.

Equity shares and preference shares are the two categories under which a company’s share capital is split. Both of these investment options have unique characteristics and are suited for investors with diverse goals. Therefore, understanding the differences between equity shares and preference shares is crucial.

What are Equity Shares?

Ordinary or regular shares of a company are known as equity shares, and they are typically given to the public to obtain money for business expansion. Equity shares are usually mentioned while discussing stock investing. When you purchase equity shares of a company, you take on ownership of that business in a proportional amount to the value of the shares you possess.

What are Preference Shares?

The shares of a company’s stock known as preference shares, also known as preferred stocks, allow its owners to enjoy additional dividend-sharing benefits over equity shares. They get priority access to the company’s assets and profits.

Equity Shares Vs Preference Shares

The key distinctions between equity shares and preference shares are listed below.

FactorsEquity sharesPreference shares
DefinitionEquity shares are ordinary shares that represent a shareholder’s ownership in the company.Shares with a preferential right for the shareholder in matter of dividend payment and capital repayment are known as preference shares.
ReturnsCapital appreciation is the kind of return received by equity shareholders.Regular dividend payments are made to preference shareholders as income.
Dividend payoutsDividends are paid to equity shareholders only after all liabilities have been paid and only after preference shareholders have received their dividends.Priority is given to preference shareholders in the distribution of dividends over equity shareholders.
Dividend RateDepending on the company’s performance and earnings, equity shareholders receive dividends at varying rates. A company may even opt not to distribute any dividends to its equity investors for a given year.Regardless of the company’s performance, the dividend rate for preference shareholders is fixed.
Company’s ObligationThe company has no obligation to pay dividends to equity shareholders.The company is obligated to pay dividends to preference shareholders.
Mandate to IssueIt is mandatory for all companies to issue equity share capital.It is not mandatory for every company to issue preference shares.
Bonus SharesEquity investors have the right to receive bonus shares from the company in exchange for their existing shareholdings.  The corporation does not issue bonus shares to preference shareholders in exchange for their existing shares.
Voting Rights  Equity shares offer voting rights.  Preference shares do not offer any voting rights to the shareholder.
Participation in Management DecisionsEquity shareholders are able to affect management decisions since they have voting rights.  The participation of preference shareholders in management decisions is not allowed. 
LiquidityBecause they are exchanged on the stock market, equity shares have a high level of liquidity. Equity shareholders can easily sell them off as a consequence.Preference shares lack liquidity. However, after a specified time, the firm may purchase the shares back from the shareholders.  
SuitabilityEquity shares are appropriate for investors with a higher risk appetite since they carry a significant risk of exposure due to market volatility and company performance.  Since preference shares lack such risks, they are viewed as being safer than equity shares. They are perfect for conservative investors.
Convertibility  Equity shares cannot be converted into preference shares.  Preference shares can be converted into equity shares.
Capital Repayment  Equity shares are refunded at the end if the company is winding up.    Preference shareholders are compensated before equity owners in the event of a company winding up.

The conclusion

Preference shares and equity shares each have unique advantages. Preference shares provide you the advantage when it comes to dividend payments, while equity shares give you voting rights and the ability to participate in business decision making process.

Depending on your level of risk tolerance and your financial goals, you as an investor can decide whether to invest in equity shares or preference shares.

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