The main difference between equity share and preference share is, equity share is the ordinary share of the company and represents parts of the ownership of shareholders in the company whereas Preference Share is the share that carries preference right overpayment and repayment of capital. As we can conclude from the name of these shares that preference share will get preference over equity share.
Now let’s discuss in detail these two shares which are equity share and preference share.
Equity Shares
Equity share is a very popular investment strategy among the shareholders. The main reason for equity share being popular to shareholders is the huge return offered by the equity share. An equity share is an ordinary share so it is issued to the shareholders or investors to earn money by investing capital in the company. Equity shares are those shares that do not enjoy preference right for dividend and do not have priority for repayment of capital at the time of winding up. They are the owner and take all the decisions regarding the company by voting power.
Features of equity share:-
Permanent shares.
A person who invented equity shares that capital has a permanent measure. No one can take it until the company winds up.
Fluctuating.
Equity share gets fluctuating dividend, which means as we have seen preference share get more priority over equity share. So at first, a person under preference share will get profit before a person under equity share will get. A person under preference share will get with fixed dividend whereas a person under equity share will get with a fluctuating dividend.
Rights of equity share.
(I) Right to vote
(II) Right to share in profit
(III) Right to inspect books
(IV) Right to transfer shares.
But here there is a condition in the right to transfer shares. Shares can only transfer to a public company, shares can’t be transferred to a private company.
Preference right in dividend and payment of capital.
It means preference share will get more priority or preference as compared to an equity share. In case if the company will wind up then the capital will go to preference share, not to an equity share.
Controlling power.
It means as we have discussed that equity shares have owners. And they have the right to vote and the right to make a decision.
Take a higher risk.
It means equity shares take a higher risk on the company. It means if company share falls or the company is not getting profit then equity share will have on higher risk as compared to preference share. As preference share get dividend with fix rate and equity share get a dividend in fluctuating rate.
Residual claimant.
They are claimant to all the earnings after expenses, taxes, etc. are paid.
No charge on assets of the company.
It means there has no right of equity shares on the shares of a company because those shares are of the company not of equity shares.
Bonus Issue.
It means when any company performs with a good profit rate, then equity shares get a share in the form of a bonus. And for that shares, they don’t have to pay for it. These shares shave free of cost.
Right issue.
It means equity shares get priority in case if they want to get shares or if any shares are issued by the company, then equity shares get priority to buy that shares. Then, that share will go outside to sell that shares.
Face value.
Equity shares have a low face value and generally, it lies between ₹ 1 to 10.
Market shares.
It means if equity share takes a good decision and if they do a good performance in the company then their market value increases. In simple words, it depends upon the decision and performance of equity share.
If we summarise equity shares then:-
• Equity shares have the right to vote and take decisions.
• Their dividend is not fixed their dividend is fluctuating.
• They have a higher risk.
• Equity shares are permanent shares they can’t get back their shares until the company will wind up.
Now let’s discuss preference shares.
Preference Shares
Preference shares are the share which has certain privileges and preferential rights are called preference shares.
Preference shares have certain rights:-
• A preferential right to get the dividend. It means whenever a company will get profit then preference shares will have priority to get that fixed dividend.
• Right to get a return of capital at the time of the company’s winding up. It means whenever a company will have winding up then the return of capital will go to preference shares first.
• They can vote only on the matter that affects their interest. Although only equity shares have the right to vote preference shares can also vote in case if there will have any effect on their interest.
Types of preference shares:-
1. Commutative preference shares- The shares on which dividend goes on accumulated until it is fully paid.
2. Non-commutative preference shares- That shares on which dividend can be paid only if the company gets the profit that year.
3. Participating preference shares- The shares on which if the company gets any profit then at first dividend will go to preference shares after that shares will go to equity shares and if any profit remains then that surplus profit will go again to preference shares.
4. Non-participating preference shares- The shares on which preference shares get dividends with a fixed rate after that they will go to equity shares.
5. Convertible preference shares- The shares on which preference shares have the right to convert into equity shares. These types of shares are considered convertible preference shares.
6. Non-convertible preference shares- The shares on which preference shares have no right to convert into equity shares. These types of shares are considered non-convertible preference shares.
7. Redeemable preference shares- The shares on which shareholders have to return capital to preference shares after a fixed period.
8. Irredeemable preference shares- The shares which returned only when the company will wind up. This type of share is considered an irredeemable preference share.
Also, Read
But after the company’s act, 2013 issuing of irredeemable preference shares have stopped.
Features of preference shares:-
• Preferential dividend.
It means preference shares will have priority to get a dividend in case of the company gets profit.
Prior payment of capital.
It means at the time of the company’s wind-up preference shares have priority to get their capital return.
• Fixed return.
It means preference shares have got fixed return in case of company’s winding up or company getting profit.
• Do not provide permanent share capital.
It means if preference shares want then they can get their capital return before the company’s winding up. It means that they can their preference shares.
• Market value doesn’t change very quickly.
It means they have fixed value, their market value doesn’t change with time
• Voting rights in respect of concern matter.
• Less risky as compared to equity shares.
It means preference shares can get their capital return in case of the company’s winding up.
• Face value is higher than equity shares.
It has approximately or more than ₹ 100.
• Not entitled to right issue or bonus issue.
If we summarise preference shares then:-
• Preference shares get priority in return for their shares.
It means in case the company will get profit or winding up then preference shares will get priority to get their shares.
• They have low risk.
It means they have a low risk of getting back their shares.
• They can only vote if their interest affects them.
It means if they feel their interest is affecting then they can vote.
Comparison
• Preference shares get priority over equity shares in case of their capital return and company shares.
• Equity shares have the right to vote and take decisions whereas preference shares can only vote if their interest affects.
• Preference shares have more face than equity shares. Where equity shares have ₹ 1-10 and preference shares have more than ₹ 100.
• Equity shares have a high risk as compared to preference shares in case of the company’s winding up or the company’s not getting profit.
• Preference shares get their dividend at a fixed rate whereas equity shares get dividends after giving dividends to preference shares at fluctuating rates.
• Equity shares have permanent shares it means they can not get their shares until the company winds up whereas preference shares can get their shares before the company’s winding up.
• Preference shares are not entitled to bonus shares or right shares whereas equity shares get bonus shares whenever the company gets profit and these bonus shares have free of cost.
• Equity shares market value changes very quickly whereas preference shares market value do not change very quickly.
These are the major difference between equity shares and preference shares.