Meaning of Equity Shares and Preference Shares
When a company needs to raise capital, it can do so by issuing shares to investors. These shares represent ownership in the company and can be broadly categorised into equity shares and preference shares. Equity shareholders have voting rights and share in the company’s profits, while preference shareholders receive fixed dividends and priority in capital repayment but lack voting rights. Understanding the differences between these two types of shares is essential for investors looking to make informed financial decisions.
Equity Shares
Equity Share Capital is the money raised by a company by issuing equity (ordinary) shares to investors. These investors become shareholders with ownership and voting rights, allowing them to participate in management decisions. The capital raised through equity shares remains with the company and can only be claimed back if the company shuts down. Additionally, equity shareholders have voting rights in the selection of the company’s management.
Preference Shares
Preference Share Capital is the money raised by a company by issuing preference shares, which gives shareholders the right to receive dividends before equity shareholders. While preference shareholders are part owners of the company, they do not have voting rights in management decisions. They are entitled to a fixed dividend rate and have the right to claim repayment of capital if the company dissolves.
Now that we have learnt about Equity and Preference Shares let’s look at the Difference between Equity Shares and Preference Shares.
What is the Difference Between Equity Shares and Preference Shares
Types of Equity Shares and Preference Shares
Types of Equity Shares
1. Authorized Share Capital – The maximum amount of share capital a company is allowed to issue.
2. Issued Share Capital – The portion of authorized capital that has been issued to shareholders.
3. Subscribed Share Capital – The portion of issued capital that shareholders have agreed to take up.
4. Paid-up Share Capital – The amount of capital shareholders have paid for their shares.
5. Rights Share – Shares offered to existing shareholders to buy additional shares at a discounted price.
6. Bonus Share – Shares issued to existing shareholders free of cost, often from company profits.
7. Sweat Equity Share – Shares given to employees or directors for their services instead of cash payment.
Types of Preference Shares
1. Cumulative Preference Shares – Shareholders are entitled to dividends from previous years if they were not paid in the current year.
2. Participating Preference Shares – Shareholders can receive additional dividends beyond the fixed rate, depending on company profits.
3. Redeemable Preference Shares – Shares that the company can buy back at a later date.
4. Convertible Preference Shares – These shares can be converted into equity shares after a certain period.
5. Non-Cumulative Preference Shares – Dividends are not carried over if not paid in a given year.
6. Non-Participating Preference Shares – Shareholders only receive the fixed dividend without the option of receiving additional profits.
7. Non-Redeemable Preference Shares – These shares cannot be bought back by the company before the maturity date.
8. Non-Convertible Preference Shares – These shares cannot be converted into equity shares.
Conclusion
Equity shares and preference shares are two important types of capital used by companies to raise funds. Equity shares offer ownership and voting rights but come with higher risk, while preference shares provide a fixed dividend and priority in dividends and asset claims, but without voting rights. Both types of shares have different features, and companies use them based on their financing needs and goals.
FAQs on Difference Between Equity Shares and Preference Shares
1. Which type of share provides a fixed dividend?
Preference shares provide a fixed dividend, while equity shares have variable dividends based on company profits.
2. Which shareholders receive dividends first?
Preference shareholders receive dividends before equity shareholders.
3. What happens to equity shareholders if a company goes bankrupt?
Equity shareholders have the last claim on the company’s assets after all liabilities and preference shareholders are paid.
4. What happens to preference shareholders if a company goes bankrupt?
Preference shareholders have a higher claim on the company’s assets compared to equity shareholders.
5. Which shares are riskier, equity or preference?
Equity shares are riskier than preference shares because they depend on company profits and have a lower claim in case of liquidation.
6. Can preference shares be converted into equity shares?
Yes, some preference shares can be converted into equity shares, depending on the terms of the issue.
7. What is the main advantage of preference shares over equity shares?
The main advantage is that preference shareholders receive fixed dividends and have priority in receiving dividends and assets.
8. Which type of share has the potential for higher returns?
Equity shares generally offer the potential for higher returns through capital gains and variable dividends.
9. Which type of share provides more stability?
Preference shares provide more stability due to fixed dividends, unlike equity shares, which have fluctuating dividends.
10. How are equity shares taxed?
Dividends from equity shares are subject to tax, and capital gains are taxed based on the holding period.
