Difference between Equity Shares and Preference Shares

The capital structure of a company may consist of common stock, preferred stock or debentures or a
combination of all the three. The combination of all the three is considered as the best one. Equity
Shares are the shares that carry voting rights and the rate of dividend also fluctuates every year. On the
other hand, Preference Shares are the shares that do not carry voting rights in the company as well as the
amount of dividend is also fixed.

Sometimes people find it tough to distinguish between equity and preference shares. This post will help
you to understand that difference easily.

Content: Equity Shares Vs Preference Shares

1. Comparison Chart
2. Definition
3. Key Differences
4. Similarities
5. Conclusion

Comparison Chart
Basis for comparison EQUITY SHARES PREFERENCE SHARES
Meaning Equity shares are the ordinary Preference shares are the shares
shares of the company that carry preferential rights on
representing the part ownership the matters of payment of
of the shareholder in the dividend and repayment of
company. capital.

Payment of dividend The dividend is paid after the Priority in payment of dividend
payment of all liabilities. over equity shareholders.

Repayment of capital In the event of In the event of winding up of the

winding up of the company, company, preference shares are
equity shares are repaid at the repaid before equity shares.
end.

Rate of dividend Fluctuating Fixed

Redemption no yes
Voting rights Equity shares carry voting rights. Normally, preference shares do
not carry voting rights. However,
in special circumstances, they get
voting rights.

Convertibility Equity shares can never Preference shares can be

be converted. converted into equity shares.
 Arrears of Dividend Equity shareholders have no Preference shareholders
rights to get arrears of the generally get the arrears of
dividend for the previous years. dividend along with the present
year's dividend, if not paid in the
last previous year, except in the
case of non-cumulative
preference shares.

Definition of Equity Shares

Equity shares are the ordinary shares of the company. The holder of the equity shares are the real owners
of the company, i.e. the amount of shares held by them is the portion of their ownership in the company.

Equity shareholders have some privileges like they get voting rights at the general meeting, they can
appoint or remove the directors and auditors of the company. Apart from that, they have the right to get
the profits of the company, i.e. the more the profit, the more is their dividend and vice versa. Therefore,
the amount of dividends is not fixed. This does not mean that they will get the whole profit, but the
residual profit, which remains after paying all expenses and liabilities on the company.

Definition of Preference Shares

Preference Shares, as its name suggests, gets precedence over equity shares on the matters like
distribution of dividend at a fixed rate and repayment of capital in the event of liquidation of the
company.

The preference shareholders are also the part owners of the company like equity shareholders, but in
general, they do not have voting rights. However, they get right to vote on the matters which directly
affect their rights like the resolution of winding up of the company, or in the case of the reduction of
capital.

Types of Preference Shares

Some of the most important types of preference shares of a company are as follows:

(i) Cumulative preference shares:

A preference share is said to be cumulative when the arrears of dividend are cumulative and such arrears

are paid before paying any dividend to equity shareholders. Suppose a company has 10,000 8%

preference shares of Rs. 100 each. The dividends for 1987 and 1988 have not been paid so far. The

directors before they can pay the dividend to equity shareholders for the year 1989, must pay the pref.
dividends of Rs. 2, 40,000 i.e. for the year 1987, 1988 and 1989 before making any payment of dividend

to equity shareholders for the year 1989.

(ii) Non-cumulative preference shares:

In the case of non-cumulative preference shares, the dividend is only payable out of the net profits of each

year. If there are no profits in any year, the arrears of dividend cannot be claimed in the subsequent years.

If the dividend on the preference shares is not paid by the company during a particular year, it lapses.

Preference shares are presumed to be cumulative unless expressly described as non-cumulative.

(iii) Participating preference shares:

Participating preference shares are those shares which are entitled in addition to preference dividend at a

fixed rate, to participate in the balance of profits with equity shareholders after they get a fixed rate of

dividend on their shares. The participating preference shares may also have the right to share in the

surplus assets of the company on its winding up. Such a right may be expressly provided in the

memorandum or articles of association of the company.

(iv) Non-participating preference shares:

Non- participating preference shares are entitled only to a fixed rate of dividend and do not share in the

surplus profits. The preference shares are presumed to be non-participating, unless expressly provided in

the memorandum or the articles or the terms of issue.

(v) Convertible preference shares:

Convertible preference shares are those shares which can be converted into equity shares within a certain

period.

(vi) Non-Convertible preference shares:

These are those shares which do not carry the right of conversion into equity shares.

(vii) Redeemable preference shares:

 A company limited by shares, may if so authorized by its articles issue preference shares which are

redeemable as per the provisions laid down in Section 80. Shares may be redeemed either after a fixed

period or earlier at the option of the company.

(viii) Guaranteed preference shares:

These shares carry the right of a fixed dividend even if the company makes no or insufficient profits.

Key Differences between Equity Shares and Preference Shares

1. Equity shares cannot be converted into preference shares. However, Preference shares could be converted
into equity shares.
2. Equity shares are irredeemable, but preference shares are redeemable.
3. The next major difference is the ‘right to vote’. In general, equity shares carry the right to vote, although
preference shares do not carry voting rights.
4. If in a financial year, dividend on equity shares is not declared and paid, then the dividend for that year
lapses. On the other hand, in the same situation, the preference shares dividend gets accumulated which is
paid in the next financial year except in the case of non-cumulative preference shares.
5. The rate of dividend is consistent for preference shares, while the rate of equity dividend depends on the
amount of profit earned by the company in the financial year. Thus it goes on changing.

Similarities

 Defined in section 85 of the Indian Companies Act 1956.

 Both are owned capital of the company.

Conclusion

Now, if anyone wants to invest his money in equity shares and preference shares you can do it very
easily. For this you, first you should gain complete knowledge about the stock market. Otherwise, there
are a lot of chances that you may suffer loss. One thing you must remember while making an investment
in any of these is, purchase the shares or stock when the market is down because at that time the prices
are generally low and sell them when the market is up as the prices of shares are relatively higher.
Similarly, another point of relevance is you must try to go for a long-term investment; it will give you
good returns for longer periods.

The best form of investment is a mutual fund as the risk is comparatively less than the individual stocks.
Do not recklessly believe on any good advice, because there are some investments which will give you
high returns, but they are the riskiest ones so think twice before you invest anywhere in the stock market.

If you don’t want to invest in the mutual funds, then there are still better options for you like, you can
directly purchase the stock of any company, when they bring new issue of shares in the form of an Initial
Public Offer (IPO), this purchasing is known as buying from the primary market. Before investing
money in any company just remember one formula Investigate before you Invest your money in any
stocks as there are chances of money loss.

If you couldn’t find any such direct purchasing, then you can contact a broker to help you in purchasing
the securities of the companies which are already listed on the Stock Exchanges like National Stock
Exchange or Bombay Stock Exchange. This type of purchasing is known as buying from Secondary
Market. It could be a little bit expensive as you have to pay the brokerage charges. But, the broker will
help you in opening an account and complete the legal formalities on your behalf. Now, you have to
decide that how much you can invest at the inception. After deciding it, you need to deposit some amount
as a part of initial investments with your broker who will purchase the securities on your instructions.
And so in this way you can easily invest in the securities.