The world of investments is quite huge and to make the most out of it, you need to learn some relevant financial terms. Otherwise, there are a few losses you might face in your future investment journey in case you’re not acquainted with these terms.
Equity shares and Preferences shares are quite similar, as they both own some shares of the company, yet they are different based on a few distinguishing factors. To have a more clear look at them, let’s learn the differences between equity shares and preference shares.
Difference between equity shares and preference shares
Now, before we tell you in brief, let’s first understand this.
What are shares?
The basic meaning of a share is “to have a portion of something with others”. Similarly, shares in business mean “a percentage of ownership in a financial asset or company whereas the people who hold these shares are known as shareholders.
Hence, depending on how many shares an investor holds, determines how much percentage of the company they own and control.
Now, that’s enough knowledge for a beginner to start. Let’s understand equity shares and preference shares.
Equity share
Equity shares are ordinary shares which offer voting and dividend only after the payment of liabilities are done. These shareholders have a fluctuating rate of dividend as the profit of the financial assets is never constant.
Equity shares are the capital raised by a company as profits. Equity shares can not be redeemed, since they play a huge role as a source of finance for the company’s assets. They are termed as the ‘risk bearers’ of the company.
Preference share
“Preference share” as the name defines, this share enjoys preference over equity shares, since the dividend here is at a fixed rate. It basically means these shareholders get paid a fixed dividend, regardless of the company’s profit or loss. Hence this also counts as a major point of difference between equity and preference shares. Even though the shareholders of preference share have no right to vote, they are still the partial owners of a company.
Moreover, they do not hold any rights or control over a company similar to equity shares. These shares can be converted into stocks and redeemed too, which once again counts as a major point of difference between equity shares and preference shares.
Difference between equity shares and preference shares
| Parameter | Equity share | Preference share |
| Definition | These shares are known as ordinary shares of the company and come with the right to vote. | These shares have preference over equity shares but these shareholders don’t have the right to vote. |
| Dividend rate | Not fixed, as it keeps fluctuating as per company’s profit. | Fixed |
| Cost | Because of the low cost of equity shares they are easily accessible. | They have high price tags which make them not accessible to small investors. |
| Role in management | They are part owners of the company depending upon the percentage of shares they own. | They don’t have any major role in management as such. |
| Convertible | No | Yes |
| Redeemable | No | Yes |
| Arrears | They cannot claim arrears of the dividend. | They can claim arrears of dividends. |
| Bonus share | Eligible | Not eligible |
| Offer Authorised share capital | Yes | Yes |
| Risk exposure | High-risk exposure depends on the performance of the company in the current market. | No actual threats as compared to equity shares. |
| Bankruptcy | They are paid after companies are done paying preference shares only. | They have the full right to claim their shares before equity shares. |
We have listed the important factors which show the differences between equity and preference share. Both these shares have some positive points which you can consider and decide which one suits you the best.
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