Investors in the financial world need to know what is the difference between equity share and preference share to take a wider view of their portfolio according to their financial goals and risk appetite. Equity shares are units of ownership that actually accompany the rights of shareholders to participate in matters of the company through voting and claim a part of the company’s profits in terms of dividends. The dividends are not constant, as they are subject to the company’s profitability. On the other hand, preference shares offer shareholders advantages concerning the payment of dividends; that is, it is usually fixed and paid before dividends are released to equity shareholders. Also, in the case of liquidation of the company, preference shareholders will be given preference before equity shareholders for any asset distribution. This shows the special financial exposure and benefits these types of shares provide, fulfilling different investor needs regarding the income stability they give and growth potential.
What is Equity Shares?
Equity share refers to ownership in partial units or fractions of a corporation; hence, equity share ownership reflects the ownership stake of equity shareholders in the company’s equity. Owners of these shares are part owners of the company. The success of the company they participate in is passed to them through dividend payments and increases the value of the shares. These benefits are at a price, though the cost of dividends is variable, and the value of the share potentially depreciates.
Types of Equity Shares
Equity shares are further subdivided into grades depending on their characteristics and advantages to the shareholders. This will ensure that the investor finds a type of share that suits his risk profile and investment strategy:
- Ordinary Shares: These are the most common equity shares that a shareholder will have. They grant the shareholder rights to the dividend and to vote in shareholder meetings. Unhived Equity shares are typically shares owned by founders and or senior management. These will earn their dividends only after all other classes of shares have received their dividends.
- Non-Voting Ordinary Shares: These shares deny the holder the right to vote on corporate matters but confer all the other financial advantages of ordinary shares.
- Bonus Shares are shares issued to present shareholders from a company’s retained earnings. The total number of shares held does increase, but at no extra cost to earn these shares.
- Growth Shares: They take up and thus produce a capital appreciation and in no way return dividends to their shareholders.
Features of Equity Shares
Different features make equity shares unique in design, place in valuation, and role within the shareholder’s portfolio.
- Rights of voting: Generally, the shareholder can vote on preferred corporate and leadership policies.
- Payments of dividends: At the discretion of the company’s board, their timing may also vary with the company’s performance.
- Possibility of Value Enhancement: It can also give the investor an incentive gift. It gives them opportunities for appreciation from the rise in their shares’ prices, which increases their investment’s value over time.
- Market Liquidity: Equity shares are generally liquid, especially those listed on major stock exchanges, thus allowing them to be bought and sold without hassles.
- Risk Exposure: The highest risk is held by equity shareholders because they form the last claimants on money in case of liquefying.
What is Preference Share?
A class of preference shares can be defined as hybrid securities with debt and equity features. More specifically, these shares typically provide fixed dividends and rank above equity shares in the distribution of profits and liquidation of assets. Commonly, such shares do not carry any voting rights.
Features of Preference Shares
Preference shares exist based on relevant features that appeal to conservative investors or those interested in steady income.
- Fixed Dividend Rates: These guarantee periodic and fixed dividend payments that are quite attractive to income-oriented investors.
- Priority Over Equity: Preference shareholders enjoy priority over equity shareholders in sharing the assets upon the bankruptcy or liquidation of the company.
- Convertible Options: Some preference shares are convertible into a stipulated number of common shares per the issuance terms.
- Redemption Feature: The company may redeem these shares for some specified date or price, giving these shareholders an exit option.
Types of Preference Shares
Preference shares in their different classes are based on the various needs of the investors, keeping in mind their perspectives of risk, return, and control.
- Cumulative preference shares: Dividends shall be accumulated if not paid in a particular year so that the shareholders can be sure they are not losing on their expected value returns.
- Non-Cumulative Preference Shares: The dividends that have not been paid shall never be carried forward for payment by the firm, thus reducing the burden of the firm’s liabilities during bad periods.
- Redeemable Preference Shares: Redeemable shares limit the buy-back by the issuing company at a predetermined fixed price after a specific time, thus allowing shareholders some exit options.
- Convertible Preference Shares: These offer an option for converting the holding into ordinary shares at the shareholder’s discretion, subject to defined conditions.
- Participating Preference Shares: Apart from fixed dividends, these shares may take part in profits i.e. after a certain threshold dividend paid to the equity shareholders.
Difference Between Equity Share and Preference Share
The difference between equity share and preference share stands separately from how the investment option is aligned with financial objectives by the investor. As stated above, such differences affect not only the expected returns but also the degree of risk and control over one’s holding that the investors will enjoy in the company.
- Dividend Rights: Equity shareholders face more uncertainty with dividends, which depend on company profits and board decisions, whereas preference shareholders typically enjoy fixed, regular dividends.
- Voting Rights: Equity shareholders usually have the right to vote on major corporate issues. Preference shareholders often do not have a vote, as they prefer financial returns rather than control.
- Return on Investment: Equity shares generally have the potential for capital appreciation, providing terrific returns once a company is in its fast-growing phase. On the other hand, preference shares promise fixed returns on investment, which is quite reassuring for risk-averse investors.
- Risk: Equity shares pose a greater risk because fluctuations in the market cause uncertain returns; preference shares are less risky, with fixed dividends and priority at liquidation.
- Redemption Features: Preference shareholders have additional features concerning the redemption of their shares, which are mostly unavailable to company shareholders.
| Feature | Equity Shares | Preference Shares |
| Dividend Type | Variable, not guaranteed | Fixed, often guaranteed |
| Voting Rights | Yes, generally | No, generally |
| Priority in Profit Distribution | Lower | Higher |
| Capital Return | High potential through capital appreciation | Limited to fixed dividends |
| Risk | Higher, dependent on company performance | Lower, more predictable |
| Redemption Feature | Not applicable | Available, terms set by issuer |
| Convertibility | Non-convertible | Convertible options available |
| Claim on Assets in Liquidation | After preference shareholders | Before equity shareholders |
| Dividend Accumulation | No accumulation | Cumulative or non-cumulative |
| Price Volatility | High | Low |
| Market Liquidity | High | Moderate to low |
| Eligibility for Bonus Shares | Yes | No |
| Tax Treatment | Dividends may be subject to double taxation | Preferential tax treatment on dividends |
| Investor Control | Significant through voting rights | Limited or none |
| Typical Holders | General public, institutional investors | Risk-averse investors, institutional investors |
| Financial Obligation of the Company | Less binding, dividends not obligatory | Strong obligation to pay dividends |
| Impact of Market Conditions | Highly sensitive | Less sensitive |
| Suitability | Suitable for those seeking growth and involvement | Suitable for those seeking income stability |
| Redemption at Premium | Not applicable | Possible at a premium |
| Participation in Excess Profits | Possible through higher dividends/share prices | Possible with participating preference shares |
Equity Shares vs Preference Share FAQs
What is the main difference between an equity and preference share?
The main points of difference are dividends and control. Equity shares are subjected to variable dividends and usually offer considerable voting rights. In contrast, preference shares offer fixed dividends and typically do not confer voting rights, so they emphasise the financial returns rather than the control.
What are the types of equity shares?
The types of equity shares you can expect a shareholder to encounter are ordinary shares, deferred shares, non-voting ordinary shares, bonus shares, and growth shares, with benefits and risks that vary from one to the other.
What unique features do equity shares offer?
Voting rights, substantial capital appreciation potential, and dividends that depend on the company’s performance are basically what equity shares offer.
What are Preference shares, can you explain?
Preference shares typically provide fixed dividends and priority over equity shares in profit distribution and liquidation of assets but without voting rights. Therefore, preference shares are hybrid securities providing debt and equity features.
What are the types of preference shares?
These include cumulative, non-cumulative, redeemable, convertible, and participating preference shares, depending on the different investor considerations to risk and return and flexibility in the financial market.
