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What is the difference between equity and preference shares?

Shares can be defined as a unit of ownership in a company that has an exchangeable value that is influenced by market forces. There are mainly two types of shares which are equity shares and preference shares. If you interested in stock trading, you might like to learn more on it.

Equity Shares 

Equity shares represent part ownership where each shareholder becomes a fractional owner of the issuing company. This type of shares carries voting rights and their rate of dividends fluctuates every year depending on the profit made.

Shares are issued to the public to raise capital, which is eventually used for the expansion of a start-up. They serve as a long-term source of finance since they are non-redeemable.

Preference Shares

Preference shares are capital raised through shareholder preferential rights as defined within a company’s articles of association. This type of shares does not carry voting rights and also the dividend is fixed.

Preference shareholders do not have claims over bonus shares. They are similar to debentures and can be converted to preferred stocks.

Also, preference share issuers have the opportunity to repurchase shares at a given date. This can extend substantial dividends to shareholders but do not come with a closing date.

Equity Shares vs. Preference Shares: Difference

Listed below are differences between equity and preference shares:

Definition

Equity shares are defined as the extent of ownership in a company, while preference shares give a shareholder a preferential right when receiving dividends or paying capital.

Dividend payout

For equity shares, once liabilities have been paid off, shareholders receive dividends. While preference shareholders receive part of the company’s profits before dividends are paid out. The shareholders are given priority over equity shareholders.

Rate of dividend

The rate of equity share fluctuates as per earnings while the rate of dividends remains fixed in preference share.

Bonus shares

Shares are entitled to receive bonus against any shareholders in equity shares while preference shares do not offer bonus against existing shareholdings.

Voting rights

Equity shares come with voting rights, while preferential shares do not give voting rights to the shareholders. 

Capital repayment

Capital repayment is repaid at the end for equity shares. In preference shares, capital repayment is paid before equity shares.

Arrears of dividend

 For equity shares, shareholders are not paid arrears of dividends, while preferential shares are allowed to avail arrears of dividends along with the current year’s dividend.

Capitalization

A high chance of Over-capitalization occurs in equity shares, while preferential shares have a relatively less chance of over-capitalization

Financing term

Finance can be long-term in equity shares, while mid-term and long-term financing occurs in preference shares.

Associated burden

For equity shares, paying off dividends is not mandatory and it also depends on the company’s profit. While in preferential share, companies are required to pay dividends to their shareholders.

Conclusion

From the differences above, both shareholders benefit in various ways. Also, a conservative shareholder would prefer preference shares to be a more convenient investment than equity shares. Choosing from both shares, all depends on your risk-taking abilities and financial goals. Above all, get more knowledge on the market when it comes to investment. 

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