The Difference Between Equity and Preference Share
When it comes to being an investor in a business, there are multiple options available to choose from. The most common types of investment are usually equity and preference shares. Both equity and preference shares entail investing in the business, but they are different in their nature and characteristics.
What are Equity Shares?
Equity shares are also known as ordinary shares. Equity shareholders are the owners of the company and have voting rights in the decision-making process of the company. The company’s profits and losses are distributed among equity holders. The dividends that the equity holders receive are decided by the company’s board of directors and are based on the company’s profitability.
As a shareholder, you are also entitled to the capital appreciation of the shares. If the company performs well, the share price can go up, and you can sell your shares at a higher price than you bought them.
What are Preference Shares?
Preference shares are a type of share capital, but they have characteristics of both a debt and equity. Preference shareholders have a preference over equity shareholders when it comes to receiving dividends. This means that their dividends will be paid before equity shareholders, and the dividend payout is generally fixed or a percentage of the share price, making the dividend more predictable for investors.
Preference shareholders do not usually have voting rights, or they have limited voting rights. In the event of liquidation or winding-up of the company, preference shares have priority over equity shares in receiving the company’s assets.
The Key Differences between Equity and Preference Shares
The key differences between equity and preference shares can be summarized as follows:
1. Ownership: Equity shareholders are the owners of the company, while preference shareholders are not.
2. Voting rights: Equity shareholders have voting rights that preference shareholders usually do not have or have limited voting rights.
3. Profit sharing: Equity shareholders participate in the company’s profits and losses. Preference shareholders have a preference over equity shareholders when it comes to receiving dividends.
4. Risk and Return: Equity shares are typically riskier than preference shares as the returns are not fixed, and there is no guarantee of a dividend payout. Preference shares, on the other hand, have a predictable dividend payout, making them less risky but with a lower potential return.
Conclusion
Both equity and preference shares have their advantages and disadvantages. Equity shares can offer potentially higher returns but are also riskier. Preference shares, on the other hand, have a lower risk and a more predictable dividend payout, making them more suitable for investors who seek income and stability. However, it is crucial to understand the differences between the two before deciding where to invest your money. It is always a good idea to seek the advice of a financial expert to make an informed decision.
Table difference between equity and preference share
| Feature | Equity Share | Preference Share |
|---|---|---|
| Definition | Equity shares represent ownership in a company and provide voting rights in the decision-making process. | Preference shares are a type of security that usually provides a fixed dividend and may have other preferences over equity shares in the company |
| Dividend Payment | Equity shares do not have any obligation to pay dividends and the payment of dividends is at the discretion of the company’s board of directors. | Preference shares have a fixed dividend payment that is usually a percentage of the face value. |
| Risk | Equity shares are riskier than preference shares as they do not have priority in dividend payments or repayment of capital. | Preference shares are less risky than equity shares as they have priority in dividend payments and repayment of capital. |
| Voting Rights | Equity shares provide voting rights that allow shareholders to participate in the company’s decision-making and elect directors. | Preference shares usually do not provide voting rights, except in certain circumstances such as non-payment of dividends. |
| Conversion | Equity shares cannot be converted into preference shares. | Preference shares can be converted into equity shares after a certain period or under specific terms and conditions. |