Introduction
Equity shares or common shares and preference shares are two common options for investing in stock market. Equity shares represent ownership in the company. Shareholders get voting rights that allow them to influence managerial decisions. On the contrary, preference shares give priority over equity shareholders in dividend payment and capital repayment. Preference share does not give voting right to the shareholders so they cannot take part in the company's decision making process.
Key Differences Between Equity Shares And Preference Shares
The main dissimilarities or differences between equity shares and preference share can be explained as follows:
1. Meaning
Equity Shares: Shares issued by the companies to raise capital that represent ownership and shareholders get voting rights.
Preference Shares: Type of equity investment that give investors priority over dividends and capital repayment during repayment
2. Features
Equity Shares: The main features of ordinary shares are as follows:
* Shareholders become the partial owner of the company
* It provides voting rights to the shareholders
* Regular dividend is not guaranteed
* It is transferable, it means ordinary shares can be bought or sold
Preference Shares: Some key features of preference share are:
* Shareholders do not get voting rights
* Dividends are paid at fixed rate
* Shareholders are paid before equity shareholders at the time of liquidation
* It may be convertible or not convertible
3. Advantages
Equity Shares: The main advantages of equity shares are as follows:
* It is easily tradable in the stock market
* It ensures participation in company decision making process
* It has long-term high returns potential
* It provides hedge against inflation
Preference Shares: The major advantages of preference share are:
* It is less risky than equity shares
* It ensures fixed and stable income
* Shareholders can enjoy tax benefits because of lower tax rate on dividends
* Preference share have convertible options
4. Disadvantages
Equity Shares: The main drawbacks of equity share are as follows:
* More risky than preference shares because of market volatility
* No guaranteed returns
* It dilutes the ownership and control
* It may cause emotional stress to the shareholders
Preference Shares: The main disadvantages of preference share are:
* It lacks voting rights
* It is less liquid than equity shares because of low trading volume
* It has lower growth potential
* Because of fixed dividend there is inflation risk
5. Dividend Rate
Equity Shares: Rate of dividend is not fixed and shareholders get dividend as per the profit made by the company
Preference Shares: Generally dividends rate are foxed for preference shares
6. Participation In Management Decisions
Equity Shares: It allows shareholders to participate in management activities
Preference Shares: Preference shareholders are not allowed
7. Face Value
Equity Shares: Face value of ordinary shares are generally lower than preference shares
Preference Shares: Face value is comparatively higher than common shares
8. Return Potential
Equity Shares: Return potential is higher than preference stocks
Preference Shares: Low return potential than equity shares
9. Suitable For
Equity Shares: These type of stocks are suitable for those investors who focus on growth
Preference shares: Preference share are ideal for investors who focus on stable income
10. Convertibility
Equity Shares: They are not convertible
Preference Shares: They can be converted into ordinary shares
Equity Shares Vs Preference Shares (Comparison Table)
|
Basis |
Equity
Shares |
Preference
Shares |
|
Ownership |
Yes |
No |
|
Risk Involved |
High |
Less |
|
Face Value |
Less |
High |
|
Voting Right |
Yes |
No |
|
Dividend Paid |
After preference shareholders |
Before equity shareholders |
|
Convertible |
No |
Yes |
|
Liquidity |
High |
Less |
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