Preference Shares vs Equity Shares

Equity shares are commonly known as ordinary shares whereas preference share enjoys more benefit while receiving their dividend distribution. The Equity shareholder possesses the right to vote in the company matter whereas preference shareholders can vote in the issues that directly affect them.

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

What are Preference Shares?

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.

Right over dividends

When it comes to dividends the preference shareholder experience preferential treatment. This could be explained in 2 ways:

  1. The preference shareholder receive a fixed rate of interest/dividend from the profits of the company
  2.  When a company is wound up the right to return of the capital before equity shareholder is with preference shareholders only.

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.

Benefits of Investing in Preference Shares

  • Preference capital generated does not create any charge against the assets of the company.
  • The investors that are interested in a fixed rate of interest and want low risk are suitable to invest in such shares.
  • Preference share generates steady income as the shareholders are given a fixed rate of return.
  • Preference shareholders have no voting right over the management of the company and hence they do not affect the control over the equity shareholders.

What do you mean by Equity Shares?

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.

Benefits of Equity Shares

  • The equity shareholders are known as the foundation of the company as they are the investors and provide equity capital of the company.
  • Investors that are interested in higher returns and are ready to take a risk for it can invest in the equity shares.
  • Rights of the equity shareholder over the management of the company make them have more control over the actions of the company then preference shareholders.
  • Equity shares funds for the company and raises the credit value of the company and provides confidence to the loan providers.

Difference Between Preference Shares and Equity Shares

 

 

Preference Shares

Equity Shares

Definition

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.

Voting Rights

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.

Concluding

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.


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