Difference Between Equity Shares vs Preference Shares
If you want to business or expands the current business but you don’t have sufficient money to do this thing’s so you have two options either to take a loan from Bank or financial institutions or to divide the cost which you unable to finance yourself into a unit and sell the unit as share in financial market. So Shares are issued by the company to raise the funds.
Shares are classified into two main types:
1) Equity Shares
2) Preference Shares.
Diagrammatic Representation of types of shares
Equity Shares are the main source of raising the funds for the firm. It is a form of partial or part Ownership in the company in which shareholders bear the highest business risk. All equity shareholders are collectively owner of the company and they have the authority to control the affairs of the business. Ownership in the company is depending on the unit of shares they hold. The Equity shareholders get the profit of company in the form of dividend but the rate of dividend is not fixed its fluctuate as per profit i.e. if more is profit they will get more dividend and vice versa. Equity shares also called as ordinary shares.
As name hint preference shares are the shares in which shareholders get the profit of the company informs dividend before Equity shareholders at a fixed dividend rate. Money raised through the issue of preference shares is called a preference share capital. Preference shareholders do not have the authority to control the affairs of the company. In the case of company insolvency issues, Preference shareholders paid first from company assets.
Head to Head Comparison between Equity Shares vs Preference Shares(Infographics)
Below is the top 9 difference between Equity Shares vs Preference Shares
Key Differences between Equity Shares vs Preference Shares:-
Let us discuss some of the major differences between Equity Shares vs Preference Shares
- Equity Shares are the main source of finance for the company, and they hold ownership in the company, whereas preference shareholders are the lender of capital to the company and do not hold voting right in the company.
- Investing in preference share is safer than Equity shares.
- Equity shareholders get the profit of the company in the form of dividend at fluctuated rate whereas preference shareholders get dividend at fix rate and prior to Equity shareholders.
- The person who is holding the Equity share cannot convert its shares into preference shares however a person who is holding preference share can convert its shares to Equity shares.
- Equity shareholders have the authority to vote in all matters however preference shareholders voting authority is restricted.
- Equity shareholders have the authority to participate in the management of the company however preference shareholders do not have the authority to participate in the management of the company.
- At the time of bankruptcy of the company, preference shareholders get the refund of capital first after selling company assets and after that Equity shareholders get a refund of the capital amount.
- Payment of the dividend is not compulsory to equity shareholders however payments to preference shareholders are paid only when the company earns the profit.
- Equity share is for those investors who are ready to take a risk and interested in higher return on the other hand preference share is preferred by those investors who are willing to invest in the company but do not want to take risk with fluctuating share price, so they favor preference share to earn fix rate of dividend.
- Preference shares are sold back to the company, however, Equity shares are sold back to someone (Buyer) in the stock market.
Equity Shares vs Preference Shares Comparison Table
Let’s look at the top Comparison between Equity Shares vs Preference Shares
Source of Division
|Equity share is the main source for raising funds, and they signify ownership in the company.||Preference shares are the shares which guarantee shareholders fix the rate of dividend, and they are a lender of capital and not an owner.|
|Equity shareholders received a dividend at a Fluctuating rate and paid after all liabilities payment.||Preference shareholders received dividend payments at a fixed rate and before Equity Shareholders.|
|In the case of company insolvency Equity shareholders payment settled or repaid at the end.||In the case of company insolvency Preference shareholders payment is repaid before the equity shareholders.|
|Equity shareholders have the right to vote on all matters of the company.||Generally, Preference shareholders do not carry the voting rights but in some cases, they get the voting rights.|
|Convertibility||Equity shares cannot be converted.||Some types of preference share can be converted to Equity shares.|
|There is no provision to accumulate the previous year dividend; due to this Equity shareholders will not get previous year overdue payment of dividends.||Preference shareholders get the previous year’s pending dividend payment in certain cases (Depend on which Type of preference share they hold).|
|A risk associated with Equity shares is higher.||A risk associated with preference share is less than compared to Equity share.|
|Investors who are ready to take risk of invest in Equity shares.||Investors who want a stable return on investment invest in Preference shares.|
|Decision of Rate||The dividend rate on Equity share is decided by the board of the company.||The dividend rate is fixed at the time of the issue of preference shares.|
So from above, it is clear that equity shares vs preference shares are types of shares issued by the company to raise the fund to full feel their requirement. Shares are issued by both public as well as private companies and if the company is in profit or say perform well shareholders of the company get that profit in the form of dividend at a fixed and fluctuated rate. Equity shares give the highest return on investment at the cost of the highest risk however preference shares give a fixed sum of money at the cost of zero or minimal risk.
If anyone looking to investing money in shares must have knowledge about the stock market to avoid losses from an upward and downward price. A share price of any company depends on the performs of the company and on some external factors. Long term investment in shares provided good returns for longer periods. If anyone looking for a risk-free investment then investing in the mutual fund is the best option for them as a risk in this comparatively less than stock.
This has been a guide to the top difference between Equity Shares vs Preference Shares. Here we also discuss the Equity Shares vs Preference Shares key differences with infographics and comparison table. You may also have a look at the following articles to learn more –