People often use stock investments to build wealth, and different types of shares offer unique advantages and disadvantages. Companies may issue either common equity or preference shares with distinct rights, benefits, and financial risks. Therefore, understanding the difference between equity shares and preference shares is essential for successful investments.
This article provides a detailed comparison between equity shares and preference shares by examining their various types and characteristics while also aligning investment options with the preferences of different investors.
Understanding Equity Shares
Equity shares give shareholders ownership rights of a company. These shares are also called ordinary shares. As shareholders own the company through voting rights, they can receive dividends based on firm financial outcomes, though their eventual profits depend on business results.
Moreover, equity shareholders take on company-generated risks, which allows them to potentially earn higher financial returns. Organisations issue equity shares into the marketplace to acquire financing to support expansion projects along with advancements and debt obligations. Here are the different types of equity shares:
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Ordinary Shares
Companies issue ordinary shares as their primary stock offering to raise capital from the public. Every ordinary shareholder receives voting rights and has the chance to obtain dividends, which depend on company profits.
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Bonus Shares
The majority of stock exchanges let shareholders receive new shares free of charge through bonus share distributions. Furthermore, stock liquidity increases while investors receive financial rewards through bonus share distributions companies make using accumulated profits.
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Rights Shares
Existing shareholders can receive initial rights shares with discounts before the stock is publicly listed. Moreover, this type of share keeps current investors fully employed at their proportional company shares and stops shareholding dilution.
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Sweat Equity Shares
Companies may reward managers and executive directors with sweat equity shares instead of their salaries. Exceptional service and expertise, together with intellectual property rights, earn employees the right to receive these stock options, which drives both retention and workplace motivation.
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Voting & Non-Voting Shares
Voting rights or non-voting rights are separate features offered by different types of equity shares. Shareholders who hold voting shares get to make organisational decisions, but those who own non-voting shares receive financial benefits without the ability to exercise managerial power.
Understanding Preference Shares
Preference shares are a special type of shares that offer certain rights over other equity shareholders. Preference shareholders receive dividends and claim assets from company liquidation in the event of bankruptcy before equity shareholders. However, preference shareholders do not typically receive permission to vote for company decisions.
Many companies issue preference shares when they want to draw investors who need stable income security while avoiding stock price fluctuations. Furthermore, the risk level of these shares stands low and produces reliable income suitable for investors with moderate risk appetite. Here are the different types of preference shares:
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Cumulative Preference Shares
Any and all accumulated unpaid dividends are paid in the future to cumulative preference shareholders. Moreover, investors benefit through dividend payment guarantees when the company encounters temporary financial problems because of this feature.
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Non-Cumulative Preference Shares
If dividends are not paid, they do not accumulate for non-cumulative preference shares. The features of these shares make them suitable for investors looking for quick profits while accepting stock price volatility and temporary dividend stops during unprofitable times.
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Convertible Preference Shares
Preference shares hold a convertible feature which grants shareholders the right to convert them into equity shares during a specified period. This flexibility to switch over to equity shares allows them to benefit from the increasing market value of the company.
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Non-Convertible Preference Shares
Preferential shareholders with non-convertible preferences cannot convert their stocks into equity shares. These shares provide investors with a fixed income stream that avoids exposure to equity price changes and does not impact company stock ownership distribution.
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Participating Preference Shares
Participating preference shareholders will get additional dividend payments when the company achieves better financial results. These investors can acquire increased profits beyond the fixed dividend by using participating preference shares, which are superior to regular preference shares.
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Non-Participating Preference Shares
A fixed dividend amount is given to the holders. Such shares do not offer any additional profit-sharing benefits and are suitable for investors who need a consistent return.
Key Differences between Equity and Preference Shares
The table below provides a detailed difference between preference shares and equity shares, outlining their key differences in ownership, dividends, risks, and returns:
| Feature | Equity Shares | Preference Shares |
| Ownership Rights | The equity shareholders have the right to ownership of the company and involvement in decision-making. They can vote on key company issues such as mergers, acquisitions, and board member elections. | Preference shareholders do not have any form of ownership. They cannot make any decisions regarding the company. Also, investors benefit from receiving fixed dividend payments and having a higher claim on company assets in the event of liquidation. |
| Dividend Payment | Dividends are sometimes paid to equity shareholders from the company’s profits. The payment is not guaranteed. Dividends are not paid in case of poor financial performance. | Preference shareholders get fixed dividends before equity shareholders. Even if a company does not earn a profit, cumulative preference shares ensure that unpaid dividends are carried forward. |
| Risk Factor | The risk of equity shares is higher due to the fluctuation in the stock market. Their value can increase or decrease drastically according to the market trend, economic conditions, and company performance. | Preference shares are less risky because the dividend is fixed and predictable. Moreover, their prices are more stable compared to equity shares. |
| Voting Rights | Equity shareholders have the right to vote, making them stakeholders in the decisions made by the corporation and board members. Such rights make them part of the strategic decisions in the company. | Preference shareholders have no voting rights, but under specific circumstances, they can be given voting rights temporarily. |
| Priority in Liquidation | In case of company liquidation, equity shareholders are last in line to receive compensation after all liabilities, debts, and preference shares are settled. This means they may receive little or nothing if company assets are insufficient. | Preference shareholders take precedence over equity shareholders in liquidation. They are paid from a company’s remaining assets before equity shareholders receive any compensation. |
| Convertibility | Equity shares cannot be converted into preference shares. Once issued, equity shares remain part of the company’s stock market offerings. | Some preference shares are convertible, meaning investors can convert them into equity shares after a predetermined period, allowing them to benefit from potential capital gains. |
| Returns | Equity shareholders have the potential for higher returns as their share value may increase significantly if the company grows. However, returns are unpredictable and depend on stock market performance. | Preference shares provide stable but limited returns as the dividend rate is fixed. Investors usually prioritise these shares for regular income rather than capital appreciation. |
Equity Shares vs Preference Shares: Which is the Right Choice?
How an investor selects between equity vs preference shares depends on their willingness to take risks and their financial objectives. Investors who are more risk-averse and need stability and fixed returns should choose preference shares because they provide more safety alongside regular dividend payouts. These shares offer lower market risks, so they serve as an appropriate investment tool for those who prefer steadier income and less market volatility.
Equity shares remain the most suitable option when your main financial objective revolves around ownership rights and substantial market value growth. Investors who need assured dividend payments and fixed-income protection can find preference shares as their suitable choice. However, organise your investment decision following an analysis of timeframes and tolerance for financial risks and your overall planning strategy.
Final Words
Investors must recognise the difference between equity and preference shares to make well-informed financial selections. Equity shares grant ownership and voting rights and potentially high returns but simultaneously bring greater risks to the investor. Shareholders who choose preference shares receive dividends while maintaining steady investments through their assured dividend payments.
To decide between preference vs equity shares, you need to understand your risk capacity and financial objectives.
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