Difference between Equity and Preference Shares

A share is a financial instrument that indicates ownership of the company’s equity with a tradeable value vulnerable to changes in market trends. As per Section 43 of the Companies Act, 2013, the company’s share capital can be classified into 2 main categories - equity and preference shares. All investors should know that the key difference between equity and preference shares lies in voting rights and dividend structure. Here’s a quick overview of equity and preference shares and further analysis of equity shares vs preference shares.

What are Equity Shares?

Equity shares are ownership units issued by the company to make the investor the shareholder of the company with the number of shares bought defining the extent of ownership. Equity shareholders have the right to trade the shares in the stock market. On buying equity shares, the shareholders get voting rights in the general meetings of the company and are entitled to receive not just the dividends as declared by the board of directors but also additional rewards such as bonus shares as per the company’s profits.

Types of Equity Shares

There are different kinds of equity shares that have specific features and benefits. Let’s explore the types here:

Authorized Capital Share:

This indicates the maximum quantity of shares that a company or organization is legally permitted for allotment to the shareholders. This is the specified higher limit specified in the memorandum of association of the company.

Subscribed Capital Share:

The subscribed capital share is a fraction of the authorized capital share issued to the shareholders. The subscribed capital share can be less than the authorized capital share.

Bonus Shares:

Companies may declare bonus shares as an alternative to dividends, reward shareholders, or grow the equity base. The bonus shares are issued at no cost and allotted only to equity shareholders.

Issued Capital shares:

The fraction of subscribed share capital that is allotted to the shareholders. The total quantity of subscribed shares may not be instantly given for allotment to shareholders.

Right shares:

The existing shareholders can have the right shares which present the scope to buy extra shares with a fixed price before the external investors are offered these shares.

Sweat equity shares:

The shares issued to the employees or directors as a part of their CTC with discounted prices are called sweat equity shares. These shares help recognize the contribution of the employees or directors in helping the company grow.

What are Preference Shares?

Preferential shares are the type of shares that offer preferential rights on ownership as compared to regular shares. This implies that people with ownership of preferential shares will have a higher preference over equity shareholders for issuing dividends at a specific rate or capital payback. When comparing equity shares vs preference shares, the preference shares have equivalent ownership as equity shares except not having voting rights. However, the preference shareholders have voting rights in aspects impacting preference shares. For instance, in cases of capital reduction, the preference shareholders have voting rights.

Types of Preference Shares

Let’s understand more about preference shares by exploring the major types as follows:

Cumulative preferred shares:

The cumulative shares aggregate the unpaid dividends that will have a payout in the future before dividend payout to the regular shareholders.

Non-cumulative preferred shares:

When the company has made less profits that are not adequate for dividend payout, the non-cumulative preferred shares will not aggregate the pending payout and the company has the right to skip the specific payment of dividend not paid.

Redeemable preferred shares:

The redeemable shares are one of the types of preference shares that can be redeemed by the company for its objective and are redeemed in a span of 20 days from the issue date.

Convertible preferred shares:

The convertible preference shares have the flexibility of conversion from a preference share to an equity share. However, the conversion is possible only after a stipulated period mentioned in the memorandum of the company.

Participating preferred shares:

he participating shares have the provision to take part in the additional profit of the company when liquidation begins after the company has completed the shareholder payments. The participating shares are preference shares having the provision to receive dividends.

Equity Shares vs Preference Shares

When considering shares for investment purposes, it is important to understand the difference between equity and preference shares. Let's explore the difference between equity and preference shares:

Conclusion

For investment in shares, the investor should have clarity on the difference between equity and preference shares. When analyzing equity shares vs preference shares, the major factor is the aspect of voting rights and dividend payout structure. The preference shares are the priority for dividend payments with a fixed rate over equity shares. But, when considering voting rights, the preference shareholders can only vote for aspects related to preference shares.Whereas, equity shares have the provision of voting rights and can also receive bonus shares. The convertible preference shares can be converted to equity shares after a stipulated period according to the company’s memorandum.