Equity Shares vs Preference Shares

Equity shares are the ordinary/common stock of the company that is required to be issued mandatorily by the companies. They give investors the right to vote and participate in the company meetings. In contrast, preference share capital carries preferential rights over the equity share capital in terms of receiving dividends and repayment of the amount invested if the company is liquidated. Preference shareholders are not entitled to vote and participate in the company’s meetings.

The corporate world has capital structures like share capital, debt fund, reserves, and surplus. Every corporate mandatorily needs to issue share capital to raise the fundamental capital for the company. Share capital can be of various kinds like equity share capital, preference share capital, etc.

• Equity and preference shares are like two sides of the coin with pros and cons. Equity Dividends depend highly on the company's performance, while preference shares are fixed and must be paid.
• Equity shareholders are the real risk bearers of the company as they have the residual share in the event of liquidation.
• The preference shareholders have a preference concerning higher claims on earnings and assets at the fixed dividend rate with no voting rights and the possibility of participating in dividends when the company's performance is good.

The equity share capital is the basic share capital that every company must issue mandatorily. Equity shareholders are the residual interest holder of the company assets. Equity shares are also termed ordinary share capital belonging to the capital structure of the owners' money.

Preference share capital means the shares with preference over other equity capital of the shareholder’s capital. Such share capital has discretion over the dividend and repayment at the time of liquidation.

Let us take an example,

ABC Limited issued:

• The equity share capital of $50 million; 5 million shares of $10 each
• The preference share capital of $5 million; 500,000 shares of $10 each

Here, preference shareholders will have preferred rights over the company's equity shares.

• Equity shares are the ordinary common stock of the company, while preference shares have specific preferential rights over the company’s equity shares.
• An equity share does not have the right to receive dividends compulsorily. Based on their type of issue, preference shares receive dividends yearly.
• Equity shares have voting rights in the company’s general meeting, while others do not have a voting right in a public forum.
• Equity shares have the right to participate in the company’s management. At the same time, the preference share is not entitled to participate in the company's management.
• For the company, it is compulsory to repay the funds to the holders of preference shares, while it is not mandatory to repay the funds of equity shares.
• Preference shares can get converted into equity shares. At the same time, equity shares cannot get converted to preference shares.
• Equity shares are entitled to the bonus shares. While the other is not entitled to the bonus shares against their existing holding.
• In preference shares, medium or large investors invest their funds, while even small shareholders can afford to invest in equity shares.

Investors need to understand the various forms of investments, as it is highly probable to suffer losses due to unfair trade. When investing the funds, the golden rule is to acquire the shares of stock when the prices are down and sell them when the prices of shares are on the upside. Also, a real investor should go for a long-term horizon, which will give them good returns for longer periods. It is how one can earn a handsome profit and can fulfill the target of achieving the best returns out of their profit.

This article is a guide to Equity Shares vs. Preference Shares. We discuss the top differences between equity and preference share using infographics and a comparison table. You may also look at the following articles: –

• What are Bonus Shares?
• Golden Handshake
• Stock vs Share
• Equity vs Assets - Differences