Equity Shares vs Preference Shares

Quick Summary

Equity shares offer voting rights and the potential for higher long-term returns, but dividends are not fixed. Preference shares generally provide priority in dividend payments and repayment of capital, making them more suitable for investors seeking relatively stable income.

Equity shares and preference shares are two common types of shares issued by companies to raise capital. While both represent ownership in a company, they differ in terms of voting rights, dividend payments, risk and repayment priority.

Understanding the difference between equity shares and preference shares can help you choose the right option based on your investment goals and risk appetite. In this blog, we will compare their meaning, features, benefits and key differences in detail.

What are Equity Shares?

Equity shares, also known as ordinary or common shares, represent ownership in a company. Your ownership percentage depends on the number of shares you hold compared with the company's total outstanding shares. Companies issue equity shares to raise capital from investors.

When you invest in equity shares, you may earn returns through dividends and capital appreciation. However, dividends are not fixed or guaranteed and depend on the company's profits and dividend policy. Equity shareholders generally also get voting rights, allowing them to vote on important company matters.

What are Preference Shares?

When you are given priority in receiving dividend payments over equity shareholders, it is called preference shares. However, you don’t get the right to vote if you are a preference shareholder. Unlike equity shares, you get fixed dividends in preference shares. Above all, this gives you a more stable income.

Equity Shares Vs Preference Shares

Here are some important differences between equity shares and preference shares :

Basis	Equity Shares	Preference Shares
Meaning	Represents your ownership in a company	Represents your ownership with preferential rights over equity shares
Ownership Rights	You have full ownership rights.	You have limited ownership rights.
Voting Rights	You have voting rights on major company decisions.	You don’t have voting rights.
Dividend	You receive variable dividends.	You receive fixed dividends.
Dividend Priority	You receive dividends after the preference shareholders.	You receive dividends before equity shareholders
Convertibility	You cannot convert them into preference shares.	You can convert some preference shares into equity shares.
Liquidation Priority	Receive payments after preference shareholders during liquidation.	Receive payments before equity shareholders during liquidation.
Returns	Higher returns over the long run.	Moderate and stable returns.
Best Suited For	If you are a long-term investor.	If you are seeking a regular income with lower risk.

Types of Equity Shares

You may come across the fact that, to raise capital, companies issue different types of shares. They can be categorised as follows:

1. Authorized Shares

You can think of authorised shares as the maximum number of shares a company is legally allowed to issue. It is the share limit of the company.

2. Right Shares

When you are an existing shareholder of a company, you are offered shares at a discounted rate. This will be issued to you before it is issued to the public. This is known as the Right Shares. This will help you maintain your ownership percentage. It will allow you to increase your investment at a lower cost.

3. Issued Shares

When you are an investor, the actual shares sold to you are known as issued shares. You can think of issued shares as a subset of authorized shares.

4. Bonus Shares

You may get rewarded by the company when you are a shareholder. The company can issue you a free additional share instead of paying you cash dividends. These are called bonus shares. You will find that the company allocates these shares when it decides to capitalize its reserves.

5. Sweat Equity Shares

You must understand that companies reward employees, directors, or professionals for their valuable contributions. Instead of cash payments, they issue sweat equity shares. You will find that these shares recognize expertise, innovation, or intellectual property. This acts as a tool to retain valuable employees.

6. Subscribed Shares

When you have committed to pay for the issued share but have not yet fully paid for it, then it is called "subscribed shares." These shares act as a binding agreement between you and the company.

7. Paid-Up Shares

When you fully pay for the value of the subscribed shares, then that portion will be known as paid-up shares. Once you make the full payment, the company can use the capital for its operations.

Types of Preference Shares

Before you invest, you should consider the following types of preference shares to secure your returns.

1. Cumulative Preference Shares

If the company does not pay dividends in a particular year, the unpaid dividend is carried forward and paid in future years when the company declares dividends. This feature gives cumulative preference shareholders greater income certainty.

2. Non-Cumulative Preference Shares

When your preference share dividend is not carried forward, they are called non-cumulative preference shares. If a company does not pay a dividend in a particular year, you cannot claim that missed dividend in future years. Thus, we can say that you have a higher income risk compared to cumulative preference shares.

3. Participating Preference Shares

In this preference share, you receive additional dividends along with fixed dividends if the company earns more profits.

4. Non-Participating Preference Shares

In these types of preference shares, you will only receive fixed dividends. You don’t get additional dividends even if the company earns more profits.

5. Convertible Preference Shares

It allows you to convert preference shares into equity shares after a specified time under a defined agreement. This gives you a feature that if the future share prices of the company rise, you can benefit from the capital appreciation.

6. Non-Convertible Preference Shares (NCPS)

It prevents you from converting preference shares into equity shares. However, NCPS can give you fix divident over time.

7. Redeemable Preference Shares

When your issuing company buys back the preference shares on a fixed date, then they are known as redeemable preference shares.

8. Non-Redeemable Preference Shares

It comes without a redemption date. However, you must know that Indian companies cannot issue irredeemable preference shares under the Companies Act, 2013 (Section 55).

Benefits Of Equity Shares

Here are the pros of equity shares:

If the business expands and becomes profitable, your investment value will also increase in the future.
You can become a fractional share owner of the company.
When you are an equity shareholder, you receive voting rights as well during meetings on important matters such as corporate policies and mergers & acquisitions.
You may receive higher dividends and get significant capital gains when the company grows and earns more.

Benefits Of Preference Shares