Explained: Key Differences Between Equity Shares & Preference Shares

A business venture has a specially designed capital structure to upkeep everyday managerial operations effortlessly well. The company’s capital framework comprises elements like share capital, debt fund, reserves and surplus. For every company, it is important to issue the share capital amount in order to recapitalize the business operational capital for achieving corporate goals. Click here to know more

The share capital is generally segregated into two distinct types:

  1. Equity Share Capital 
  2. Preference Share Capital 

What are Equity Shares? 

The equity share capital is the fundamental share capital investment of the company that has to be issued and earmarked by the company on a mandatory basis. The equity shareholders are marked as the residual interest owner of the assets in the company. Since this type of capital structure design reflects the owner’s capital, it is also known as ordinary share capital. 

What are Preference Shares?

Preference share capital refers to the shares that hold more weightage than the original share capital of the shareholders in a company. The preference shareholders have more right over the dividend and its repayments during the liquidation period. There are many types of preference shares like Convertible and Nonconvertible, Cumulative and Non-cumulative, Participatory and Non-Participatory, etc.

Key points of difference between Equity shares and Preference shares

Equity and preference shares have a thin line of difference between them. Both have their attached merits and demerits but also are a resourceful mechanism for the business to function. The prime points of difference have been mentioned meticulously below, have a look. 

  1. Share of dividend

Equity shareholders do not essentially have a right to receive a dividend share. Preference shareholders being different in nature from the equity shareowners can receive dividends on the basis of their time of cumulative or non-cumulative or cumulative nature.

  1. Rate of dividend 

The rate of dividend for equity shareholders is not uniform and keeps changing, unlike the preference shareholders who enjoy a fixed rate of dividend.

  1. Voting rights

The voting rights are granted to the equity shareholders in a general meeting.  Whereas the preference shareholders could not have voting rights. 

  1. Repayment procedure 

It is not mandatory to repay equity shares to the investors while the preference shares need to be repaid.

  1. Liquidation of shares 

During the liquidation period, the equity shareholders being the residual investors will have the leftover right over the assets of the business. The assets can also be acquired after the repayment of the preference shares to the investors. While the preference shareholders will be authorised to the repayment procedure to all employee payments and payments of the secured and unsecured creditors. 

  1. Can be applied for trades 

Equity shares are tradable in nature. It can be traded through stock exchanges. While the preference shares cannot be traded in the market. 

  1. Participation in the managerial roles

Equity shareowners have primary managerial roles in the company, unlike the preferred shareholders who do not participate in the management of the business.

  1. Application of bonus shares 

Equity shareholders are eligible for bonus shares against their invested holdings, but the preference shareholders aren’t. 

  1. Conversion 

The preference shares can be easily converted into equity shares. In hindsight, equity shares being the original shares cannot be converted into preference shares.

  1. Classification

The equity shares cannot be classified further as being considered the original stock but the preference stocks possess variegated divisions like Convertible and Nonconvertible, Cumulative and Non-cumulative, Participatory and Non-Participatory, etc.

The bottom line

Both equity shares and preference shares are a major part of the company’s capital structure. Investors should have full-fledged knowledge about the areas to invest in context to the market changes. Since the nature of business is to face intermittent and unprecedented losses, one must be aware of the market trends and the trading route of the company they seek to invest in.