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.

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Shares and Debentures - The Capital Raising Tools for Companies

Running a startup is an unrealistic idea until you have a huge amount of money/capital to invest in the assets and infrastructure. Making huge investments alone is quite impossible for any individual or group and here comes the need for them to ask for help (capital) from the outsiders (investors) in lieu of the shares/debentures in the company. 

However, there are other ways for a company to get loans but the most preferred way of raising the capital for them is by issuing the shares and debentures in their company to potential investors. There is a cyclic process of development, the more the investors invest in companies, the more the companies will yearn profits which will lead the company to progress. The company earning good will give more profits to its stakeholders who are owning shares and debentures in the company. 

Shares and Its Kinds

Shares are granted by the company in lieu of the investment made by the investor and thus the investor/shareholder becomes a partial owner in the company. The entire capital needed by the company is divided into smaller units that have the same monetary value. These units or Shares are offered to the investors in lieu of capital given by them. Further the transaction of shares is authenticated by the purchase issued by the company to the shareholder. The purchase is called ‘Share Certificate’. 

The value of shares for purchase is called ‘Share Price’ and the actual value of the shares that is written in the books of account is called Par/Nominal/Face value of the shares. From the overall profit earned a part is kept with the company and the rest is diffused in between the shareholders in the form of ‘Dividend’. 

‘Dividends’ are the returns of the investment made by the investor. 

Also Read:- All You Need to Know About Debentures, Its Types, Advantages and Disadvantages

Kinds of Shares

• Equity Shares - One cannot redeem the shares once they have invested in it. The only way here to get the money before the dividend is by selling the shares to another investor who is interested in the deal. While dispersing the dividends equity shareholders will get their percentage after the preference shareholders are done. Equity Shareholders have Voting Rights in the Company. 

• Preference Shares - Such shareholders are paid dividends at a fixed rate and get an upper-hand when it comes to paying dividends. Such shareholders have on voting rights in the company’s major decisions. 

Debentures and Its Kinds

A business needs capital to progress and therefore it takes loans from the potential investors in lieu of Debentures. Debentures can be held by banks, financial institutions, and individual investors. People or groups owning debentures are called ‘Debenture Holders’ in the company and the proof of ownership they hold is called 'Debenture Certificate’.

Debenture holders in the company are also denoted as ‘Creditors’. The group of debenture holders is paid no matter if the company is in a loss or profit. Interests are paid to the investors (on regular intervals or upon maturity) and the loan amount is repaid to them upon maturity of ‘Loan Bond’. They are denied any voting rights in the company.    

Kinds of Debentures

Depending on the nature of payment or maturity period, below mentioned are some types of debenture:

1. Redeemable Debentures
2. Irredeemable Debentures
3. Bearer Debentures
4. Registered Debentures
5. Convertible Debentures
6. Naked Debentures

Shares V/S Debentures

Though both are the mediums of raising capital for the company there is a difference in the pattern the profit is distributed among the Types of Shares and Debentures.

• Returns

Shares - The rate of dividend is entirely based on the profits earned by the company.

Debentures - The rate of interest is fixed no matter if the company is in profit or loss.

• Payment Policies

Shares - Shareholders are paid after debenture holders get their interest.

Debentures - Debenture holders get the priority over shareholders when it comes to payment of interest or dividend.

• Obligations

Shares - The dividend earning of the shareholder entirely depends on the profit earned by the company. The company is not obliged to pay if there is no profit.

Debentures - The company is obliged to pay interest to the debenture holders no matter the company is in profit or loss. It is anyways the interest on the loan that the company has taken and it needs to repay.

• Companies Exiting

Shares - Shareholders might lose their part of ownership in companies’ profits if the company winds up its business.

Debentures - Companies while winding up their business are liable to pay the entire amount of the investment to debenture holders.

• Right To Vote

Shares - Shareholders enjoy the right to vote in the major decisions of the company.

Debentures - Debenture holders are denied any voting rights in the major decisions of the company.

• Companies Exiting

Shares - Shareholders might lose their part of ownership in companies’ profits if the company winds up its business.

Debentures - Companies while winding up their business are liable to pay the entire amount of the investment to debenture holders.

• Risk

Shares - The risk of losing the profit is more are the shareholders are paid from the residual profit of the company.

Debentures - The risk of profit earning is NIL as they get timely interests and loan repayment on contract maturity regardless of the company’s condition in the market.

• Redeemability

Shares - The shares once purchased are non-redeemable except in the case of preference shares.

Debentures - They can only be redeemed upon maturity. Interests are paid at regular intervals or in any other pattern decided.

• Maturity

Shares - Shares have no maturity period and therefore are paid only upon closing.

Debentures - Debentures have a maturity period that is mentioned on the debenture certificate and the company is required to repay upon maturity of those debentures.

Also Read:- Equity Shares: Classification, Benefits & Drawbacks

In the End

By the above discussion, it is evident that both shareholders and Debenture holders can be called investors of the company. Every company tries very hard to maximize the returns to shareholders and also to pay interest to debenture holders in time. By increasing the shareholder’s wealth company makes its shareholders loyal to the company for a lifetime.

Debenture holders and shareholders both are contributors to the progress of any company. Clearly debenture holders are a priority at the time of payment but a company never fails to bring in profits for its shareholders as well. In the worst cases, this happens that shareholders are left barehanded. Companies always try to yearn profit for themselves and their shareholders so that they (companies) can sustain for long. In fact, the right to vote is a benefit given to the shareholders because they are the ones who will be equally affected by the progress or breakdown of the companies.

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SAG RTA: Benefits As Preferred Choice of Investors & MF Houses

SAG Infotech is one of the most trusted names when it comes to tax software providers. The company is standing high and is consistently setting standards for its counterparts for the past 20+ years in India. After proving its excellence in the field of tax software development it has stepped out to facilitate the public with its new Registrar and Share Transfer Agent.

SAG RTA is a venture of SAG Infotech and is also the first SEBI qualified RTA agency Pan Rajasthan. SEBI being an inspection department for the entire mutual fund transactions closely investigates the potential of an entity for becoming an RTA. 

SAG RTA is glad to have successfully qualified the SEBI investigation and become the first Registrar and Transfer Agent agency in Rajasthan. 

SAG RTA is now willing to keep up to the expectations of its associated clients and is dedicated to providing top class RTA facilities to individuals or entities associated with it.

Read Also: Registrar Transfer Agent Benefits To Mutual Fund House

Below-mentioned is the reasons why one should opt for SAG RTA services and how they are benefitted:

1. Top Class RTA Services - SAG RTA effectively offers the entire RTA services to its valued clientele. From dematerialization of shares to transaction record-keeping, executing share transfer, investor data-keeping, query handling, dividend payout, and lot more. SAG RTA offers its expert services when it comes to opening a Demat Account with Depository participants and converting the physical shares to electronic form. SAG RTA is a third party intermediary between the MF house and investor.    
2. Availability of Entire RTA Application Forms - SAG RTA is capable of providing various application forms required by the investors, MF houses, public limited companies, and other relevant agencies related to Mutual Fund compliances. The said application forms (as authorized by the government) could easily be downloaded from SAG RTA website. SAG RTA allows download and submission of crucial forms like a request for the change in address/name/signature, security transfer form.    
3. Uniques Dashboard Availability (Individuals and Professionals) - SAG RTA facilitates all its clients (investors or professionals) with a unique dashboard login facility on the website. Professionals like CA and CS can also avail of dashboard login services. 
4. Firm Links With National Depositories - SAG RTA has strong links with the two main national depositories namely Central Depository Services (CDSL) and National Securities Depository Limited (NSDL). This is the plus point for the MF houses or investors associated with SAG RTA as it is easy for them to place applications on these giant depositories with SAG RTA being the medium.    
5. Affordable Services - SAG RTA is capable of satisfying and retaining its clients through its complete RTA related Services and that too in pocket-friendly prices. Pocket-friendly prices of SAG RTA is another advantage that keeps it on the preferred list of the customers.     
6. Expert Backend Support - Associated clients can easily reach us via call or SMS and gain knowledge or ask any query related to Mutual Funds. SAG RTA’s expert team is a service for the associated Mutual Fund house in terms of client deal. Apart from customer support, the expert team will also help the company validate its MF data, preserve it and present it in front of the authorities as and when needed.    
7. Timely Updates - Last but not least, the company constantly keeps its users updated with the stirs of the Mutual Fund market, the related new laws, compliance requirements, amendments in the application form and so on. SAG RTA is known to follow the entire protocol set by the government in terms of MF management and it effortlessly coordinates with the changes in the laws designated by the government.

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Key Difference Between Allotment of Shares And Issue of Preference Shares

When a company looks to raise capital, share allotment and share issue serves as two major criteria for it. The primary difference between allotment and issues of shares is such that the process of allotment is the method of share distribution within the company whereas the issues of share enable a company to dilute its equity by offering its shares to general public or shareholders, who can later hold them or transfer to another investor.

What Does It Mean By Allotment of Shares? 

The process of allotment refers to the distribution of shares among the interested shareholders either through a lottery scheme or some type of algorithm for allotment. The allocation process also decides the overall composition of the shareholding among investors, which is also helpful in determining the bargaining power (majority or minority) of shareholders. 

Three most popular types of Allotment of Shares process that are commonly practised by companies include: 

Share Allotment via Initial Public Offering (IPO)

When a company is listed on a stock exchange by doing an IPO and starts trading shares to the general public. A large number of investors, i.e., the general public gets involved in such kind of share allocation process, unlike a very limited number of private investors in a company. 

Allotment via Rights Issue or Bonus Issue

When shares are allocated among the existing shareholders of a company as opposed to the new ones. In case of rights issues, shares are generally offered at a discounted price to shareholders by the company. On the other hand, in case of a bonus issue, shares are allocated to existing shareholders instead of dividend payment. 

Read Also:- A Brief Overview of Employee Stock Option Plan (ESOP)

Bulk Share Allotment to individual or Institution

Companies can also issue shares to a particular selected party like an institutional shareholder, venture capital firm or business angel. Such type of allotment generally results in a change of ownership status since a bulk amount of shares are distributed. 

What Does It Mean By Issue of Preference Shares?

A legal transfer of ownership of the shares by a company to its investors is known as the issues of shares. Once a company issues shares to investors, then it is at the hand of investors completely whether they want to hold their shares or transfer their ownership by selling the shares to other investors. 

Initially, when a company gets incorporated, a number of its shares are issued which is dependent upon a number of factors. A legal document called ‘Prospectus’ is used to specify all relevant information related to the issue of shares. Companies can also seek professional advice to decide how much shares they wanted to issue to the public. 

Authorised Share Capital

Authorized share capital is also known as the registered share capital. This is the maximum amount of capital that a particular company is allowed to raise from the public via the issue of shares. The registered share capital of a company should also be mentioned in the Certificate of Incorporation, which is a legal document to declare the formation of a company. During a single issue, the entire number of authorized shares cannot be issued by the company. 

Dilution of Control

Once shares are issued to the general public during an IPO event, then become shareholders of the company. This can also result in a change in the ownership structure of the firm. Hence, it is at the hand of existing owners of the firm how much control they want to forgo by deciding the number of shares that are issued during an IPO event. 

The price at which shares are issued is equally important as the number of shares issued during an IPO event. The pricing should be attractive so that prospective investors can purchase it without sending any negative signals into the market. Companies operating in a high growth market with a unique product can put their share prices high as opposed to ones operating in a competitive market. 

Read Also:- All You Need to Know About Debentures, Its Types, Advantages and Disadvantages

Structure of The Company

The private or public structure of the company also affects the number of shares that can be issued. Regulations for issuing shares are minimum for private companies whereas in case of public companies a nominal value is specified which must be at least £50,000 of the issued share capital. 

Funding Requirements And Company Size 

Large scale companies have more funding or capital requirements when compared to small ones. Furthermore, when a company is well established, it can easily attract more funding since investors are more willing to put their money in already established corporate entities for getting more profits. 

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