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Shares have 2 types, one is equity shares and the other is preference shares. The main factor by which people differentiate these terms is the difference in payment of dividends.
Yeah! the only difference that a retail investor know is that equity shares contain fluctuating dividends while the preference shares are entitled to fixed dividends and nothing more than this or maybe some info about the voting rights of their respective shareholders.
But today in this article you’re going to know every minute detail about every parameter related to the types of shares and the exact answer to the question, “what is the difference between equity shares and preference shares?”
Everyone knows equity shares as “ordinary shares” or “common shares” because they’re mainly held by the common shareholders of the company i.e. retail investors.
Many people call them “voting shares” also as they carry voting rights with them.
The one who holds the equity shares is known as the “Equity shareholder”.
1. Dividend
- Payment of dividend
Equity shareholders get the dividend from the capital reserves which the company accumulate from the net profit after paying off the debts.
- Rate of dividend
The dividend rate is not fixed and keeps on fluctuating according to the performance of the company in the given year.
- Arrears of dividend
As the dividend rate depends on the company’s performance. So, what if the company’s performance in any given financial year is not that good that it is in losses after deducting the expenses, debts and taxes etc. from its turnover.
It’s not the rule that the company has to give the dividend to its common shareholders; so the company could skip the process of distribution of dividends for that specific year and not be responsible for giving the dividend, which was supposed to give in that year when the company had faced the losses, in the next coming years when it will get benefited from its business.
2. Voting rights
Equity shareholders carry the voting rights and by doing so they can affect the company-oriented decisions.
For instance electing the board of directors, participating in the company’s management etc.
3. Liquidation event
During the winding-up of the company, equity shareholders are repaid at the last.
4. Price stability
The price of equity shares depends on their demand and supply in the market as these are the shares that get traded in the market so their price also went up and down and remains unstable.
5. Bonus shares
Equity shareholders are entitled to get the bonus shares whenever the company announces a bonus issue or a stock split.
6. Redemption and Convertibility
Equity shares aren’t redeemable nor convertible which means they do not have a maturity period like preference shares (in case they’re redeemable preference shares) and they can be converted into preference shares.
7. Company’s motive to issue equity shares
Companies raise funds by issuing equity shares from a long-term perspective and that’s why it acts as a basic foundation for a company.
So, if a company decides to raise capital through equity funds; it goes with issuing equity shares i.e. companies must issue equity share capital.
8. Income source
As the equity shareholders do not get fixed dividends, their main source of income is the trading of the shares whose value depends on the market situation.
A preference share is the type of share which have some preferential rights over the equity share. Generally, they’re considered as an asset class somewhere between the equity shares (as they carry features of shares) and the bonds or debentures (as they offer fixed income as fixed dividends).
Don’t try to look for the difference between the preference shares and the term “preferred stock” as both are synonymous with each other.
1. Dividend
- Payment of dividend
Preferred shareholders also get the dividend from the capital reserves but they are given more priority over equity shareholders when it comes to the dividend payment.
- Rate of dividend
The dividend which the preference shareholders get is known as a “preferred dividend” and it has a fixed rate.
- Arrears of dividend
Preference shareholders are likely to avail themselves of arrears of dividend along with the current year’s dividend. They’ve nothing to do with the market situation of the company whether it is facing loss or the profits; they just want their fixed dividend as promised by the company.
Exceptional case: If the type of preference share is non-cumulative then the shareholders would not get the arrear.
2. Voting rights
Preferential shares do not have voting rights. They can’t participate in the company’s management decisions. Instead of voting rights, the company is giving them preferential rights on matters of dividends and early payment in case of liquidation.
3. Liquidation event
In the event of the winding-up of the company, preference shares are repaid before equity shares.
4. Price stability
Preference shares are more stable than equity shares as they’re not available for trading in the market; their price doesn’t get affected.
5. Bonus shares
Preference shareholders do not get bonus shares like equity shareholders.
6. Redemption and Convertibility
Preference shares can be redeemed after their maturity period is over and in case they’re convertible preference shares, the company can convert them into equity shares after a fixed interval.
7. Company’s motive to issue preference shares
Preference shares serve as a means of midterm and long-term financing.
Companies can get more funding with preferred shares because some investors want more consistent dividends and stronger bankruptcy protections than common shares offer while in the case of issuance of equity shares through IPO, there are chances of under subscription of the IPO.
8. Income source
As the preference shares have their value on their own, the other way by which the shareholders get the income is consistent dividends.
Equity Shares | Preference Shares |
Equity shares represent the ownership in the company | Preference shares also represent company's ownership but they carry preferential rights |
Investors who hold equity shares are known as 'equity shareholders' | Investors who hold preference shares are known as 'preference shareholders' or 'preferred shareholders' |
Often the divided rate that equity shareholders get fluctuates and shareholders do not have right to get arrears of previous year's dividend | Preference shareholders' dividend rates are fixed and they do get arrears of prevoius year's dividend |
Company decides whether to pay dividend to the equity shareholders or not | Company has to pay dividends to preference shareholders |
Eqity shareholders can participate in company's decisions because they have voting right | Preference shareholders do not have voting right |
Equity shares are entitled to get the bonus shares | Preference shares do not offer bonus shares |
Equity shares are neither get converted into preference shares nor redeemed by the company | Preference shares can be converted into equity shares and are redeemable after a specific period |
Equity shares serve as a medium of long-term financing | Preference shares serve as a mean of medium- or long-term investing |
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