What Is The Main Difference Between Preference Shares And Equity Shares

Preference Shares And Equity Shares
Preference Shares And Equity Shares

Shares are the heard words from the person who is engaged in any business or initiating any business. Shares are nothing but the reflection or indication of a person holding a unit of ownership in a particular company.

Shares are mainly of two types: Equity shares and Preference shares. Let’s discuss the types of shares along with the difference between preference shares and equity shares.

What Is A Preference Share?

The term “preferred stock” is also used to refer preference share. The preferred stock are the stocks of a company business with dividends which are to be paid to the shareholders before the payout of the dividend of common stock.

The person who holds the preferred stocks or the preference shares prioritize in case where dividends are to be paid. The preferred stock is a type of security or shares that provides a preferential right of claiming dividends as well as the preferential right of claiming repayment of capital in case where the company is winding up.

Features Of Preferred Stocks

  1. The person holding a preference share is given priority or the preference as such person gets fixed percentage of dividend irrespective of the amount the profit gained by the company.
  2. The holders of preference shares are prioritize when it comes to pay over any other class of shareholders.
  3. The preference shares stand as a source of hybrid financing as it possess certain characters of equity shares and some of the debentures i.e., the hybrid security.
  4. The preference shareholders are given the pre-emptive right.
  5. The person holding preference shares are not given the right to vote in the annual general meeting of a company.
  6. Preferred stocks are long term source of finance.
  7. The holders of preferred stocks possess the right on assets in case when the company is liquidated.

What Is An Equity Share?

The term “ordinary share” is also used to refer as equity share which shows the ownership a person is holding in any company business. The equity shares are the long-term financing source of any company business as they are issued to the general public.

The terms like face value, book value, par value, etc are used to express the term equity shares. The people who invest in equity shares possess fractional ownership along with the right to vote, right of share in profits, and other rights.

These shares are being traded very actively in the stock market. Equity shares can also be understood as the bulk of the shares being issued by a particular company.

Features Of Equity Shares

  1. Equity shares are of irredeemable nature that means they do not possess a maturity period.
  2. The holders of equity shares provide the right to control that means the control over the management also the holders of equity shareholders possess the right in the decision making process in a company or business.
  3. The holders of equity shares have the right to vote in meetings or decision-making processes, which may be consequent in manipulating or influencing the company’s decisions.
  4. The holders of the equity shares possess the right to claim on assets in case where the company or the business is winding up.
  5. Equity shares are liquid in nature i.e. they can be transferred easily without any consideration from one person to another person.
  6. The holders of equity shares possess the right of claiming on income i.e. right over the profits earned of the company.
  7. The possessors of equity shares have limited liability to an extent of the value of shares they have purchased.

Difference Between Preference Shares & Equity Shares

Preference shares

Equity shares

The shares bring preferential rights in case of receiving dividends and repaying capital.

These shares bring the extent of ownership of the shareholder in a company or they bring fractional ownership in a company business.

In case of dividend payout, the holders of preference shares are given the priority over the equity shareholders.

The equity shareholders receive their dividend when all the liabilities are paid off.

The preference shareholders receive the fixed amount/ rate of dividend.

The rate of receiving dividends fluctuates according to the earnings of the company or the rate of dividend is not fixed.

The holders of preferred stocks do not get any bonus against existing shareholders.

The equity shareholders receive the bonus against the existing shareholders.

The holders of preferred stocks do not have the right to vote in decision making process of the company.

The holders of equity shares possess the right of voting.

The holders of preferred stocks do not get any role in management

The holders of equity shares have the right or the power in the management of the company.

These shares possess redeem nature.

They cannot be redeemed.

Preferred stocks can be converted

Equity shares can be easily converted.

There are potentially less chances of over-capitalization.

There are potentially high chances of over-capitalization.

These shares may be of mid-term as well as of long-term financing.

These are of long term financing.

Not all companies are required to issue the preferred stocks

The companies are mandatorily required to issue the equity share.

Mostly the preferred stocks come with potentially high denominations.

They possess lower denominations.

Preferred stocks are generally prioritized by the people who are risk-averse investors.

These are suitable for the investors who are risk-taking.

Paying off the equity shareholders is not compulsory as it completely depends upon the company earning profits.

Companies or the business must have to pay the dividend to the preferred stockholders as it is an associated burden with the preference stocks.

You can also read: What Is Stock Split & Bonus Issue, Key Difference Between Stock Split & Bonus Issue

Conclusion

The conclusion is clearly inferred that both types of shares i.e. equity and preference have their own benefits and their own drawbacks as equity shareholding brings the voting right to the person in the decision making process of the company but on the other hand, preferred stockholders are given priority in case of dividends payouts.

The investors can opt or choose any of these shares for investment depending upon the capacity of risk-taking along with the desire of achieving financial goals.

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Frequently asked questions (FAQ)

Why preference shares are better than equity shares?

It is generally believed that making an investment in preference shares or the preferred stocks is far safer than equity shares as they have prior claim on assets of the company along with fixed dividends which is why, the preference shares seems better than equity shares. Mostly the people draw their investments in preference shares in order to generate robust gains.

How do I buy preference shares?

The preference shares can be bought either through the primary market or through the secondary market via online or offline trade.

What are four types of preference shares?

The main four types of preference shares are named as: cumulative preferred shares, non-cumulative preferred, participating preferred shares and convertible shares.

Why do companies issue preference shares?

The companies or the business issue preference shares because of the reason that they bring the equity financing or the long-term financing without losing the voting rights i.e. by this way the hostile takeover is avoid or prevented.

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