Know About Types and Difference Between Equity and Preference Shares

Before going over the difference between equity and preference shares lets understand the meaning of shares. Funds are required for running any business whether big or small. There are a lot of sources in the market from which an individual can raise funds for the business. Share is a source of raising funds for the fulfillment of day to day or other types of requirements of a company. 

Share is a part of equity if a company. It denotes the ownership of a company. If you own 10% shares of a company it means that you own 10% of the company. The rate of shares keeps fluctuating according to the demand in the market. 

There are two Types of Shares Equity Shares and Preference Shares. Both are similar in a lot of ways but have some characteristic differences that separate them from each other. 

Read Also: Equity Shares: Classification, Benefits & Drawbacks

Equity Shares:

The word shares are often referred to the equity shares. When people say shares they generally mean equity shares. Equity shares provide a part of ownership in a company thus involves a lot of risks. 

Dividends received by the Equity Shareholders depend upon the total profit earned by the company so it is possible that equity shareholders may not get any dividend if the company has insufficient profits at its disposal.

Preference Shares:

The preference shareholders are given preference over the equity shareholders when provided dividend by the company. The preference shareholders are given a fixed percentage of dividends despite the change in the profits of the company. The percent of dividend is pre-decided and written on the preference share agreement. 

Difference Between Equity and Preference Shares:

• Rate of Dividend

The rate of dividend received by the preference shareholders is fixed unlike that of equity shareholders as equity shareholders receive dividends according to the profits earned by the company.

• Issue of Shares

It is mandatory to issue equity shares through Initial Public Offer while the issuance of preference shares depends upon the wishes of the company.

• Trade

Equity shares can be traded in the share market easily while the preference shares can not. Thus there is no change in the face value of preference shares over time.

• Types of Shares

There are different types of preference shares like participating preference shares, convertible preference shares, etc. but there is only one type of equity share.

• Price

The price of preference shares is higher than that of equity shares which means it can not be afforded by everybody.

• Handling while Liquidation

The preference shareholders are paid before the payments of equity shareholders in case of liquidation of the company.

• Repayment

The preference shareholders are repaid by the company after a fixed period of time while the equity shareholders may or may not get repaid.

• Voting Rights

The equity shareholders enjoy the right to vote in the AGMs and GMs of a company, but the preference shareholders are not given the right to vote.

• Bonus Shares

The equity shareholders can easily claim bonus shares, unlike the preference shareholders. 

• Dividend

If the preference shareholders are not given dividends for a year then it gets accumulated in the next year, while equity shareholders may or may not receive a dividend for any year. 

• Conversion

The preference shares can be converted into equity shares but equity shares can not be converted. 

Read Also: Shares and Debentures: Similarities & Dissimilarities

Both types of shares have their own benefits. It totally depends on the needs of an individual, which one does he want to purchase.