You might be a budding investor or a student if you are curious to know the difference between equity shares and preference shares. Hope you would have a basic idea regarding equity shares and preference shares.
If you don’t, you can follow the link below for more details such as types, advantages and disadvantages of equity shares as well as preference shares.
In this article, we will be focusing only on key differences between equity shares and preference shares on the basis of different aspects.
Equity shares vs Preference shares:
Although both equity and preference shareholders possess some proportion of ownership in the company, yet the major difference is that the equity shares are the ordinary/ common shares don’t have any specific rights or preference.
Preference shares, on the other hand, have the rights to receive a fixed rate of dividend and will be preferred over equity shareholders at the time of recovery of the capital amount if the company winds up or gone bankrupt.
There are different types of preference shares which provide additional features according to the investors and the company requirements.
|Aspects||Equity Share||Preference Share|
|Rights||Common/ordinary shares (No special rights)||Possess preferential rights|
|Types||No specific types||Cumulative & Non-Cumulative
Participating & Non-participating
Redeemable & Non-redeemable
Convertible and Non-convertible
Preference shares with Callable option
|If dividend not declared||Will be lapse||The cumulative dividend (Can't be lapse)|
|Additional returns||Can't participate in surplus profits||Can participate in surplus profits|
|Redeemibility||Can't be redeem||Can be redeem|
|Convertibility||Can't be converted to preference shares||Can be converted to equity shares|
Difference between Equity Shares and Preference Shares:
- Equity shares are the general/ordinary shares of a company which don’t entitle to receive a fixed dividend even sometimes don’t receive any dividend if the company makes no profit, on the other hand, preference shares have rights to be paid a fixed dividend.
- Equity shareholders may or may not be paid off a dividend at the end of the financial year as it depends upon the performance of the company in terms of profit, whereas preference shareholders are entitled to be paid off fixed dividend whether the company makes a profit or not.
- If the company doesn’t declare a dividend for a particular financial year, equity shareholders won’t receive any dividend, on the other hand, for the preference shareholders, the dividend payment becomes arrears and will be paid further cumulatively prior to any dividend is paid to equity shareholders.
- Preference shares provide rights to participate in the surplus profit if the company is in profit after clearing dividend of equity shareholders whereas equity shares don’t have such options.
- Preference shares may and may not be redeemable after or before stipulated time period stated by the company whereas equity shares can’t be redeemable at all.
- Preference shares can be converted to equity shares whereas equity can’t be converted to preference shares.
- Equity shares provide rights of voting in AGM or management of the company, on the other hand, preference doesn’t have voting rights.
Thus the preference shares score over equity shares on the basis of the above comparison guide. Preference shares are more popular among investors because of their flexibility and unique features.
All in all preference shares are comparatively less risky because of their different types through which an investor can hedge the risk of loss and defaults.