Difference Between Equity Shares and Preference Shares

Difference between Equity Shares and Preference Shares

Sannihitha Ponaka •

Updated on 30 Jan, 2024

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What are Equity Shares?
What are Preference Shares?
Key Difference between Equity and Preference Shares

Equity shares represent the ownership of a company. While preference shares have preferential rights to the company’s profits and assets. Also, the major difference between equity and preference shares is the voting rights and claim over the company’s dividends and assets. Equity shareholders enjoy voting rights, while the preference shareholders enjoy preferential claims over the company’s profits and assets. This article lists the differences between equity shares and preference shares. Before we look at equity shares vs preference shares, let’s understand equity and preference shares.

What are Equity Shares?

A company issues equity shares to raise capital at the cost of diluting its ownership. Investors can purchase units of equity shares to get part ownership of the firm. By purchasing the equity shares, investors will be contributing towards the total capital of the company and becoming its shareholder.

Equity shareholders are the owners of the company to the tune of the shares held by them. Through equity investing, investors benefit from capital appreciation and dividends. In addition to the monetary benefits, equity holders also enjoy voting rights in critical matters of the company.

What are Preference Shares?

Preference shares or preferred stock represent ownership in a company. Preference shareholders enjoy the preference over common shareholders on the assets and earnings. Also, in case of bankruptcy, preferred shareholders enjoy the priority to receive the company’s assets before common shareholders.

A company issues preference shares to raise capital. This becomes part of the preference share capital. Preference shareholders receive dividends before the equity shareholders. A specific type of preference share is eligible to receive arrears of dividends. Furthermore, you can easily convert these shares to equity shares.

Key Difference between Equity and Preference Shares

The following table summarizes preference shares vs equity shares:

Basis of Difference	Equity Shares	Preference Shares
Definition	Equity shares represent the ownership of a company.	Preference shareholders have a preferential right or claim over the company’s profits and assets.
Return	Capital appreciation	Regular dividend income
Dividend Pay-out	Equity shareholders receive dividends only after the preference shareholders receive their dividends.	Preference shareholders have the priority to receive dividends.
Dividend Rate	Varies based on the earnings.	The rate is fixed.
Bonus Shares	Equity shareholders are eligible to receive bonus shares against their existing holdings.	Preference shareholders do not receive any bonus shares against their holdings.
Capital Repayment	Equity shareholders are paid last.	Preference shareholders are paid before the equity shareholder when the company is winding up.
Voting Rights	Equity shareholders enjoy voting rights.	Preference shareholders do not enjoy voting rights.
Participation in Management Decisions	Equity shareholders have voting rights, and as a result, they participate in the management decisions.	Preference shareholders do not participate in management operations.
Redemption	Equity shares cannot be redeemed.	Preference shares can be redeemed.
Convertibility	Equity shares cannot be converted.	Preference shares can be converted to equity shares.
Arrears of Dividend	Equity shareholders do not receive arrears of dividends.	Certain types of preference shareholders are eligible for arrears of dividends.
Capitalization	High chance	Low chance
Types	Ordinary shares, Bonus shares, Rights shares, Sweat equity, and Employee stock options.	Convertible, Non-Convertible, Redeemable, Irredeemable, Participating, Non-Participating, Cumulative, Non-Cumulative, Preference Share with a Callable Option, and Adjustable Preference Shares
Financing	Source of long term financing.	Source of medium to long term financing.
Mandate	Companies have to issue equity share capital.	All companies don’t have to issue preference share capital.
Investment	Lower investment option.	High investment option.
Suitability	High risk-takers	Low risk or risk-averse investors
Company’s Obligation	The company has no obligation to pay dividends to equity shareholders.	The company is obligated to pay dividends to preferred shareholders.
Liquidity	Highly liquid, traded on the stock market.	Not liquid, but the company can buy back the shares.
Bankruptcy	Equity shareholders are paid only after fully paying the preference shareholders.	Preference shareholders have a preferential claim over the assets. Therefore, they are paid before equity shareholders.
Liquidation	Equity shareholders are paid only after making payments to creditors and preference shareholders.	Preference shareholders are paid after paying the creditors and before the equity shareholders.