Even though equity and preference shares are quite similar, they are not the same. The key distinction is in how they entitled shareholders and paid dividends. In this article, we will look into the difference between preference shares and equity shares in detail. We will also discuss what equity and preference shares are, their types, merits, and demerits. We will also talk about the similarity between equity shares and preference shares.
What Does Equity Share Capital Mean?
The common shares of a corporation are known as equity shares. The company's real owners are the holders of equity shares, and the number of shares they own represents a part of that ownership. Equity shareholders have several benefits, including voting rights at general meetings and the ability to choose or dismiss the company's directors and auditors.
In addition, they are entitled to share in the company's profits; therefore, the higher the profit, the higher the dividend, and vice versa. Consequently, the dividend payment amount is variable. This does not imply that they will receive the entire profit, just the portion left over after all costs and liabilities to the company have been covered.
Benefits Of Owning Equity Shares
- Voting rights for equity shareholders are available for significant corporate decisions.
- Equity Shareholders are qualified for several perks, including dividends and bonuses.
Drawbacks Of Owning Equity Shares
- Dividends are not guaranteed; you may or may not get them depending on the corporate decision.
- High investment risk
Types Of Equity Shares
The various types of equity shares are rights share, bonus share, sweat equity share, authorized share capital, issued share capital, subscribed share capital, and paid-up capital.
What Does Preference Share Capital Mean?
Preference Shares, as their name suggests, take precedence over equity shares in situations like the payment of capital in the case of a company's liquidation and the delivery of dividends at a fixed rate. Like equity shareholders, preference shareholders are also partial business owners but typically lack voting rights. However, they can vote on issues that directly affect their rights, such as the resolution to dissolve the company or the case of a capital decrease.
Benefits Of Owning Preference Share
- Dividend rates are set.
- Eligible for dividend arrears.
- Regardless of the company's success, a fixed return on investment.
- These can be changed into stock options.
- A lower investment risk.
Drawbacks Of Owning Preference Share
- Preference shareholders are not allowed to vote.
- Whether the dividend rate rises after purchasing shares, preference shareholders will only get dividends at the predetermined rate. This may lessen the chance of realizing substantial returns on investment.
Types Of Preference Shares
The preference shares are participating preference shares, non-participating preference shares, convertible preference shares, non-convertible preference shares, cumulative preference shares, and non-cumulative preference shares.
Difference Between Preference Shares And Equity Shares
In this section, we will discuss the difference between preference and equity shares in terms of 15 different aspects. Let's look at the different aspects individually and how they differ for equity shareholders and preference shareholders -
Voting Rights
Equity shareholders are entitled to vote on important corporate decisions. Preference shareholders do not have a vote in the company's decision-making process.
Capital Repayment
Equity shareholders are the last to be repaid and receive capital repayment at the time of the corporate collapse. Contrarily, equity shareholders receive capital repayment before preference shareholders do.
The Rate Of Dividend
The rate of dividend payout to equity investors is set. The Board of Directors decides the dividend rate for equity owners after taking the company's performance over the preceding fiscal year into account. On the other hand, preference owners get dividends at a fixed rate set at the average share price.
Role In Management
Equity shareholders are referred to as a company's partial owners based on the number of shares they own. On the other hand, preference shares offer no advantages in terms of their management function.
Bankruptcy
After preference shares have been fully paid, equity stockholders are compensated. Unlike equity owners, preference shareholders have full priority rights to capital payments.
Bonus Shares
Preference shareholders are not eligible to obtain bonus shares from the firm, whereas equity shareholders can receive company bonuses.
Cost
Equity shares are inexpensive, which makes them accessible to small investors. Preference shares, on the other hand, have higher price tags and are therefore more affordable for medium- to large-sized investors.
Liquidation
Preference shareholders can receive all forms of payment in the case of liquidation after paying the company's creditors. Once all outstanding payments have been made, equity shareholders will fully own the company's assets.
Capitalization
Preference shares offer fewer opportunities for over-capitalization than equity shares, which have higher chances.
Redemption
Equity shares are not redeemable until the company has existed for a long time. Preference shares, on the other hand, can be redeemed after a specific time or after successfully attaining the intended aim.
Financial Burden
Equity dividend payments are voluntary because they depend entirely on business profits and don't entail any set financial obligations. On the other hand, preference shareholders are subject to a predetermined dividend payment and financial responsibility from the business.
Arrears
Preference shares have a claim over the arrears of the dividends, whereas equity stockholders have no claim over the arrears.
Financing Term
Preference shares are used for mid- and long-term financing, whereas equity shares are used for long-term financing.
Risk Exposure
Equity investors are highly exposed due to the volatility of the market and the company's performance. Preference shares provide no risk and are safer than equity shares.
Denomination
Preference shares often have a larger denomination than equity shares, which typically have a lower denomination.
Similarities Between Equity And Preference Shares
- Both equity and preference shares are acknowledged, described, and defined in section 85 of the Indian Companies Act 1956.
- Another similarity between equity and preference shares is that they are owned capital of the enterprise.
Conclusion-
In conclusion, only general investors are permitted to purchase equity shares of a corporation. However, it is advantageous for every investor to comprehend the main difference between equity shareholders and preference shareholders and the perks and drawbacks associated with purchasing equity shares and preference shares. The more you understand about the equities market, the more confident you can feel about your financial choices.