Equity Shares are the shares that carry voting rights and the rate of dividend also fluctuate every year as it depends on the amount of profit available to the company. On the other hand, Preference Shares are the shares that do not carry voting rights in the company as well as the amount of dividend is also fixed.
One of the major difference between equity shares and preference shares is that the dividend on preference shares is cumulative in nature, whereas the equity share dividend does not cumulates, even if not paid for several years.
When a decision has to be taken on the capital structure, one must go for a mix of the two types of shares, in the share capital of the company. And for this, one needs to have a general understanding on the two, so take a read of this article and know the difference.
Content: Equity Shares Vs Preference Shares
Comparison Chart
| Basis for Comparison | Equity Shares | Preference Shares |
|---|---|---|
| Meaning | Equity shares are the ordinary shares of the company representing the part ownership of the shareholder in the company. | Preference shares are the shares that carry preferential rights on the matters of payment of dividend and repayment of capital. |
| Payment of dividend | The dividend is paid after the payment of all liabilities. | Priority in payment of dividend over equity shareholders. |
| Repayment of capital | In the event of winding up of the company, equity shares are repaid at the end. | In the event of winding up of the company, preference shares are repaid before equity shares. |
| Rate of dividend | Fluctuating | Fixed |
| Redemption | No | Yes |
| Voting rights | Equity shares carry voting rights. | Normally, preference shares do not carry voting rights. However, in special circumstances, they get voting rights. |
| Convertibility | Equity shares can never be converted. | Preference shares can be converted into equity shares. |
| Arrears of Dividend | Equity shareholders have no rights to get arrears of the dividend for the previous years. | Preference shareholders generally get the arrears of dividend along with the present year's dividend, if not paid in the last previous year, except in the case of non-cumulative preference shares. |
Definition of Equity Shares
Equity shares are the ordinary shares of the company. The holder of the equity shares are the real owners of the company, i.e. the amount of shares held by them is the portion of their ownership in the company.
Equity shareholders have some privileges like they get voting rights at the general meeting, they can appoint or remove the directors and auditors of the company. Apart from that, they have the right to get the profits of the company, i.e. the more the profit, the more is their dividend and vice versa. Therefore, the amount of dividends is not fixed. This does not mean that they will get the whole profit, but the residual profit, which remains after paying all expenses and liabilities on the company.
Definition of Preference Shares
Preference Shares, as its name suggests, gets precedence over equity shares on the matters like distribution of dividend at a fixed rate and repayment of capital in the event of liquidation of the company.
The preference shareholders are also the part owners of the company like equity shareholders, but in general, they do not have voting rights. However, they get right to vote on the matters which directly affect their rights like the resolution of winding up of the company, or in the case of the reduction of capital.
The following are the types of preference shares:
- Participating Preference Shares
- Non-Participating Preference Shares
- Convertible Preference Shares
- Non-Convertible Preference Shares
- Cumulative Preference Shares
- Non-Cumulative Preference Shares
Key Differences Between Equity Shares and Preference Shares
- Equity shares cannot be converted into preference shares. However, Preference shares could be converted into equity shares.
- Equity shares are irredeemable, but preference shares are redeemable.
- The next major difference is the ‘right to vote’. In general, equity shares carry the right to vote, although preference shares do not carry voting rights.
- If in a financial year, dividend on equity shares is not declared and paid, then the dividend for that year lapses. On the other hand, in the same situation, the preference shares dividend gets accumulated which is paid in the next financial year except in the case of non-cumulative preference shares.
- The rate of dividend is consistent for preference shares, while the rate of equity dividend depends on the amount of profit earned by the company in the financial year. Thus it goes on changing.
Similarities
- Defined in section 85 of the Indian Companies Act 1956.
- Both are owned capital of the company.
Conclusion
Now, if anyone wants to invest his money in equity shares and preference shares you can do it very easily. For this you, first you should gain complete knowledge about the stock market. Otherwise, there are a lot of chances that you may suffer loss. One thing you must remember while making an investment in any of these is, purchase the shares or stock when the market is down because at that time the prices are generally low and sell them when the market is up as the prices of shares are relatively higher. Similarly, another point of relevance is you must try to go for a long-term investment; it will give you good returns for longer periods.
The best form of investment is a mutual fund as the risk is comparatively less than the individual stocks. Do not recklessly believe on any good advice, because there are some investments which will give you high returns, but they are the riskiest ones so think twice before you invest anywhere in the stock market.
If you don’t want to invest in the mutual funds, then there are still better options for you like, you can directly purchase the stock of any company, when they bring new issue of shares in the form of an Initial Public Offer (IPO), this purchasing is known as buying from the primary market. Before investing money in any company just remember one formula Investigate before you Invest your money in any stocks as there are chances of money loss.
If you couldn’t find any such direct purchasing, then you can contact a broker to help you in purchasing the securities of the companies which are already listed on the Stock Exchanges like National Stock Exchange or Bombay Stock Exchange. This type of purchasing is known as buying from Secondary Market. It could be a little bit expensive as you have to pay the brokerage charges. But, the broker will help you in opening an account and complete the legal formalities on your behalf. Now, you have to decide that how much you can invest at the inception. After deciding it, you need to deposit some amount as a part of initial investments with your broker who will purchase the securities on your instructions. And so in this way you can easily invest in the securities.
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