Equity shares and preference shares are both types of stocks or shares that represent ownership in a company. However, they differ in terms of rights, dividend payments, and risk profiles.
This article will disclose the difference between equity shares & preference shares in detail to give our readers a better understanding of the subject. To start with, let’s acknowledge the definition of equity shares and preference shares first.
What are Equity Shares?
The person who owns equity shares is the actual corporate risk bearer. Equity shares are those that are eligible to collect dividends from the corporation and have voting rights in significant decisions. Depending on the annual profit the company makes, the dividend rate varies every year. Additionally, the profit in this case is the sum that is left over after deducting all costs and other payouts. Additionally, the transferability of the equity shares is unaffected by the type of shares that the shareholder possesses.
Equity shares define your ownership in the company and are also considered a highly volatile type of investment. The reason is that sometimes they’re not liable to receive any dividend on the investments if the company does not book any profits.
What are Preference Shares?
As the name says, preference shares. They have certain preferences over equity shareholders which we will discuss in the further sections. These shareholders do not enjoy having a say in important decisions, but they must cast a vote if the firm is insolvent or liquid. The right to receive a predetermined amount of dividends annually belongs to the preferred shareholders, who are also the owners of the business. If the management chooses not to distribute the dividend in any given year, they must do so the following year. Additionally, although preference shares are convertible into equity shares, they cannot be traded on a stock exchange.
Ownership and Voting Rights
Equity shares represent ownership in the company and shareholders have voting rights in general meetings. They can participate in the decision-making process by voting on important matters.
Preference shares do not typically carry voting rights. Shareholders with preference shares generally do not have a say in the management or decisions of the company.
Equity shareholders receive dividends based on the profitability of the company after all obligations and payments to other stakeholders are fulfilled. The amount of dividend distributed to equity shareholders may vary from year to year.
Preference shareholders have priority over equity shareholders when it comes to dividend payments. They receive fixed dividends at a predetermined rate before any dividends are distributed to equity shareholders. The fixed rate of dividend for preference shares is specified at the time of issuance.
The order and preference of repayments of the capital of distributable profits are other major differentiating criteria between equity and preference shares. In case of liquidation or winding-up, equity shareholders are entitled to receive their share in the remaining assets after satisfying all liabilities and obligations.
Preference shareholders have a preferential right in receiving back their capital invested before equity shareholders.
Equity shares generally carry higher risk compared to preference shares since they do not offer any specific guarantees such as fixed dividends or capital repayment.
Preference shares often provide more stability and lower risk because they offer fixed returns through dividends, regardless of how well the company performs financially.
Convertibility and Redeemability
Equity shares cannot be converted into any other type of security nor can they be redeemed by the issuing company. Some preference shares may be convertible into equity shares based on predetermined conditions specified at the time of issuance. This allows preference shareholders to convert their holdings into equity if desired.
It is important to note that the terms and conditions of equity and preference shares can vary from company to company. It is recommended to carefully review the company’s bylaws, articles of association, or shareholder agreements for specific details on the rights associated with each type of share.