Difference Between Equity Shares and Preference Shares : Beginner’s Guide

Difference Between Equity Shares and Preference Shares (1)

Do you like watching Shark Tank but are facing trouble understanding some of the financial terms they use? Or do you just want to start your journey as a financial investor? If your answer to any of these questions is yes, then you are at the right place!

Having a clear understanding of different investment options is extremely important. So, therefore, we are going to discuss a detailed difference between equity shares and preference shares. 

Quick Intro

Before knowing what is the difference between equity shares and preference shares, we must understand what is a share. A share is a unit of ownership in a company. These shares are then further categorized into equity shares and preference shares.

Here, let’s have a look at the brief description of both to have a general idea:

What are Equity Shares?

Equity shares are also known as ordinary shares or stock in more general terms. These shares represent a part of the company. When you own a stock, you become a shareholder of the company. Buying equity shares makes you eligible for the company’s profits and losses.

Let me explain this with an example:

Suppose, Mr. Ram purchases Rs.10,000 worth of equity shares in Company X, then he automatically holds a stake that is equal to that amount in the same company. 

What are Preference Shares?

Preference shares, as the name suggests are those shares that enable the shareholders to receive dividends by the company before the equity shareholders. Companies usually issue these types of shares to raise capital. 

Let’s take an example:

Suppose, Company X declares a dividend of Rs.10, preference shareholders will be the first ones to receive this dividend. The amount left after paying the shareholders will be distributed among the equity shareholders.

Feature Comparison

Here is a table showing the comparison between the features of equity shares and preference shares:

Feature Equity Shares Preference Shares
Voting rights Equity Shareholders get voting rights. Preference shareholders do not get any voting rights.
Claim on dividends Equity shareholders receive dividends on low priority i.e. after the preference shareholders receive their dividends. They have the priority of receiving dividends and are the first to receive them
Dividend Rate The dividend rate keeps changing and fluctuating. Dividend Rate is fixed.
Preference in case of losses They are the last to get paid in case of bankruptcy. They get paid before equity shareholders in the event of bankruptcy.
Claim to assets Equity shareholders have a right to claim over the company’s assets whenever they decide to wind up operations. They do not have any right to claim their assets in any case.
Cost of Issue The cost of the issue is high. The cost of issue is low as compared to equity shares
Participation in management decisions They have the right to participate in management decisions. Preference shareholders do not have the right to participate in management decisions.
Convertibility Equity shares cannot be converted. Preference shares can be converted into equity shares.
Redemption Equity shares cannot be redeemed Preference shares are redeemed.
Arrears of dividend Equity shareholders do not receive arrears of dividend Preference shareholders are eligible for arrears of dividends.
Risk Higher risk as they are the last ones to get paid in case of liquidation. Lower risk due to priority during liquidation and a fixed amount of dividend.

Conclusion

I hope after reading this article, you have got some clarity on the difference between equity shares and preference shares. While these shares differ in some aspects, both are part of company-owned capital that can diversify your portfolio and grow wealth. 

Therefore, make sure to select the most suitable investment option depending on your risk capacity and financial goals


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