Difference between Equity Shares and Preference Shares

Introduction

Equity shares and preference shares are two types of financial instruments that companies use to raise capital. Both types of shares are issued by a company to raise money, and both offer ownership in the company to investors. However, there are some significant differences between the two types of shares.

What are Equity Shares?

Equity shares, also known as ordinary shares, represent ownership in a company. Equity shareholders are the owners of the company, and they have voting rights at the company’s annual general meetings. Equity shareholders also have the right to receive dividends from the company’s profits, but they are not guaranteed a dividend payment.

What are Preference Shares?

Preference shares, on the other hand, give investors priority over equity shareholders when it comes to dividend payments and the distribution of assets in the event of a company’s liquidation. Preference shareholders do not typically have voting rights, but they have the right to receive a fixed dividend payment, which is typically higher than what equity shareholders receive.

Which is More Risky?

Equity shares are generally considered to be riskier than preference shares. This is because equity shareholders are the last to receive any payments. In the event of a company’s liquidation, preference shareholders are paid their dividends and get their share of the company’s assets before equity shareholders receive anything.

Which is More Profitable?

Equity shares are typically more profitable than preference shares. While preference shareholders receive a fixed dividend payment, equity shareholders have the potential to earn more in the form of capital gains if the company’s stock price increases. This is because equity shareholders are the owners of the company and benefit when the company performs well.

Conclusion

In conclusion, equity shares and preference shares are different financial instruments. While equity shares represent ownership in a company and offer the potential for greater profits, preference shares offer a fixed dividend payment and priority over equity shareholders when it comes to payments and the distribution of assets in the event of a company’s liquidation. Both types of shares offer investors different levels of risk and reward, and it is up to investors to decide which type of share is best for their investment objectives.

Table difference between equity shares and preference share

Difference Between Equity Shares and Preference Shares

Aspect	Equity Shares	Preference Shares
Ownership	The equity shareholders are the owners of the company and have voting rights.	The preference shareholders are not the owners of the company and do not have voting rights.
Dividend Payment	Equity shareholders receive dividends at the discretion of the company’s directors.	Preference shareholders receive fixed dividends, which are paid before equity dividends.
Risk	Equity shareholders bear higher risk than preference shareholders.	Preference shareholders bear lower risk than equity shareholders.
Repayment	Equity shares cannot be redeemed by the company.	Preference shares can be redeemed by the company after a certain period of time.
Priority	Equity shareholders have no priority in the repayment of capital in case of liquidation.	Preference shareholders have priority in the repayment of capital in case of liquidation.