Difference between Preference Shares and Equity shares
Key difference is that while Preference shareholders enjoy the benefit of receiving their dividend distribution first; the equity shareholders enjoy voting rights in major company decisions, including mergers or acquisitions.
A Company can issue two types of shares viz. Equity Shares and Preference Shares. Equity shares are also known as Ordinary Shares. While Preference shareholders enjoy the benefit of receiving their dividend distribution first; the equity shareholders enjoy voting rights in major company decisions, including mergers or acquisitions. Preference shares have the right to receive dividend at a fixed rate before any dividend is paid on the equity shares. Further, when the company is wound up, they have a right to return of the capital before that of equity shares.
The key differences between preference shares and equity shares are listed in the following table:
|Difference between Preference Shares and Equity shares|
|Basis of Distinction||Preference Shares||Equity Shares|
|Rate of Dividend||Paid at fixed rate||May vary , depending upon the profits|
|Arrears of Dividend||Get accumulated for cumulative preference shares||No accumulation|
|Preferential Rights||Before Equity shares||After|
|Winding up||Have a right to return of capital before equity shares . This means they are safer.||Only paid when preference share capital is paid fully|
|Voting Rights||No voting rights||Voting rights|
|Right to participate in Management||Have NO right||Have right|
Apart from the above, the preference shares may carry some more rights such as the right to participate in excess profits, which a specified dividend has been paid on the equity shares or the right to receive a premium at the time of redemption.
The preference shares are safer investments than the equity shares. In case the company is wound up and its assets (land, buildings, offices, machinery, furniture, etc) are being sold, the money that comes from this sale is given to the shareholders. After all, shareholders invest in a business and own a portion of it.
Please note that usually, the preference shares are most commonly issued by companies to institutions. That means, it is out of the reach of the retail investor. For example, banks and financial institutions may want to invest in a company but do not want to bother with the hassles of fluctuating share prices. In that case, they would prefer to invest in a company’s preference shares. Companies, on the other hand, may need money but are unwilling to take a loan. So they will issue preference shares. The banks and financial institutions will buy the shares and the company gets the money it needs. This will appear in the company’s balance sheet as ‘capital’ and not as debt (which is what would have happened if they had taken a loan).
Preference Shares are NOT traded in stock exchange. This also means they are not ‘liquid’ assets; there’s little scope for the price of these shares to move up or down. On the other hand, ordinary or equity shares are traded in the markets and their prices go up and down depending on supply and demand for the stock. But, that does not mean the investor is stuck with his shares. After a fixed period, a preference shareholder can sell his/ her preference shares back to the company. This cannot be done with the ordinary shares. Ordinary shares can be only sold to another buyer in stock market. One can sell the ordinary shares back to the company only if the company announces a buyback offer.