A company can issue two different types of shares i.e. Equity shares and Preference Share. Equity shares are also known as Ordinary shares. While preference share is commonly referred to as preferred stock
A preference share is instruments that have debt and equity characteristics i.e. they have fixed dividends. Preference shareholder has higher privilege over claiming the assets than ordinary or equity shareholders.
Preference shareholders do not enjoy the voting rights but if they have not been paid for more than 2 years they can claim their voting right in such cases. Preference shares can be further divided into Cumulative and Non-Cumulative preferential shares.
When it comes to dividends the preference shareholder experience preferential treatment. This could be explained in 2 ways:
Hence; preference shares exercise more rights while participating in excess profits, on the other hand, the equity shareholder receives funds or dividend only when preference shareholders have recovered there dividend.
Equity shares are commonly referred to as ordinary shares, the owners of the equity shares form part or functional ownership in the company. These shareholders take the maximum risk as they receive debentures only after the company has paid preferential shareholders.
The capital raised by issuing such shares is known as 'ownership capital' and hence the shares represent the ownership of the person in the company. These shares act as the foundation while creating the company.
The shareholders are not paid a fixed dividend like preference shareholders they are paid according to the earning of the company; The shareholders do have right to participate in the management of the company i.e. they have the right to vote wherever the management of the company is in question such right is not available with preference shareholders.
Preference shares are company stock where the dividends are paid to the holder before common stockholder.
Equity shares are the functional part of the company the shareholders own part ownership in the company.
They have no right to vote in the company matters unless it affects them directly.
They have complete voting rights
In case of Winding Up
The preference shareholders receive the capital before equity shareholders.
They are paid only after the preference shareholders have received their arrears.
Participation in Management
They have no right to participate in the management of the company
The equity shareholders have complete right to control the management of the company.
Investors of the company that are looking for investing in hybrid debt can invest in preference shares of the company whereas investors that are looking at higher returns even if the risks involved are higher can go for equity shares of the company.