Difference between Preference Shares and Equity Shares

Life-blood of any business is finance. Sufficient finance for the company helps to grow and expand the company. The financial needs of any business are concerned with the acquisition and utilisation of funds. It is done through planning, acquiring, utilising, managing, and controlling funds in connection with the business. Issuing shares is one of the most prominent ways to arrange funds for the business. The capital of a company is divided into large units with definite face value called shares.

Share is always a fixed denomination with a distinct number and has a face value. A company with share capital can issue shares at its very inception for raising capital and cannot be issued or transferred in fractions. Shares can be offered directly for public subscriptions. It can be fully or partially paid up.

A public limited company can issue only two types of shares:

A. Equity Shares

B. Preference Shares 

What are Equity Shares?

Equity Shares have no special privilege attached. Equity Shares are the shares that have no preferential right on payment of dividends and repayment of the capital in case of winding up. Equity Shares have no fixed rate of dividend. The rate of Dividend of equity shares depends upon the earned profit of the company of the accounting year. Equity Shares are called risk capital because these shares are more speculative. Equity Shares are the most ‘ risk and rewards’ shares of the company. The risk involved is losing part or all the value of shares if the business incurs losses. Rewards of equity shares involve payment of higher dividends and appreciation in the market value.

Equity Shares are the permanent capital of the company with no mortgage of assets of the company, as it is not redeemable shares. The risk of Equity Shares is diffused with the option of issuing further shares for raising capital. Equity Shares are profitable during inflation, and also Equity Shareholders have the chance to get bonus shares when the company earns huge profits. Equity Shares enjoy the perks of receiving higher dividends and appreciation of the value of assets.

What are Preference Shares?

Preference Shares have special privileges attached. Preference Shares have preferential rights on payment of dividends and repayment of the capital in case of winding up. Preference Shares have a fixed rate of dividend. The Rate of Dividend of the preference share is affixed with the issue of the share. Preference Shares enjoy the preferential right to receive divided during the year before equity shares. On liquidation of the company, preference shares are entitled to be repaid before the equity shares.

Preference Shares are redeemable and convertible into equity shares on the terms of the issue of shares. The risk involved with investment is less as the rate of return as dividend is fixed with the issue. Preference Shares strengthen the financial position of the company by adding to the equity base. Preference Shares have a longer maturity period, and it saves the company from paying a higher rate of interest by issuing debentures.

Difference between Preference Shares and Equity Shares:

Basis	Equity Shares	Preference Shares
Right to Dividend	Equity shareholders receive dividends after preference shareholders are paid.	Preference shareholders receive dividends before the equity shareholders are paid.
Right to Vote	Equity shareholders have the right to vote in the decisions of the company, i.e., in all circumstances.	Preference shareholders have the right to vote only in special circumstances.
Right to Participate	Equity shareholders have the right to participate in the management of the company.	Preference shareholders do not have the right to participate in the management of the company.
Rate of Dividend	Rate of dividend of equity shares depends on the profit of the company. The Board of directors decides the rate of dividend and is approved by the shareholders.	Rate of dividend of preference shares is fixed.
Arrears of Dividend	On equity shares, no arrears of dividend is paid. Dividends on equity shares are declared every year and if not declared during the year, dividends are not accumulated to be paid in coming years.	Arrears of Dividend is given to cumulative preference shareholders before the dividend is distributed to equity shareholders.
Convertibility	Equity Shares are not convertible.	Preference Shares can be converted to equity shares if the terms of the issue provide so.
Redemption	The company may buy back its equity shares.	Preference Shares are redeemable.
Refund of Capital	In the case of winding down the company, Equity shareholders receive their capital after preference shareholders capital are paid.	In the case of winding down the company, Preference shareholders are repaid their capital before equity shareholders.
Nominal Value of Shares	Equity Shares have a low nominal value of shares.	Preference Shares have generally high nominal value.
Appeal for investors	Equity Shares are appealing purchases for adventurous investors.	Preference Shares are appealing purchases for conservative investors.
Risk Involved	High risk is involved in terms of return and repayment.	Low risk is involved in terms of return and repayment.
Market Value of Shares	The value of equity shares fluctuates.	The value of preference shares does not fluctuate.