Equity Shares & Preference Shares in detail

WHAT ARE EQUITY SHARES ?

Equity shares are long-term financing sources for any company.

These shares represent the ownership of a company and capital raised by the issue of such shares is known as ownership capital or owner’s funds. They are the foundation for the creation of a company.

These shares are issued to the general public and are non-redeemable in nature. Investors in such shares hold the right to vote, share profits and claim assets of a company.

FEATURES OF EQUITY SHARES

Equity shares have the following main features –

• Equity shareholders have the right to control the affairs of the company.
• Equity share capital remains with the company. It is given back only when the company is closed.
• The equity shareholders have the voting rights and can participate in the management of the company.
• The liability of shareholders is limited to the extent of their investment.
• These shares are transferable from one person to other.

WHAT ARE PREFERENCE SHARES ?

Preference shares are defined as those shares which are given priority over other equity shares in terms of the payment of dividends.

Also , in the event of liquidation of a particular company, the preference shareholders are paid off before ordinary shareholders.

Capital raised by the issue of preference shares is called preference share capital.

FEATURES OF PREFERENCE SHARES –

The preference shares have the following main features-

• Preference shareholders receive dividend payouts in situations where other stockholders may not be receiving any dividends or may receive dividends later.
• Preference shareholders generally do not enjoy any voting rights.
• Preference shares resemble debentures as both bear fixed rate of return to the holder. 
• These shares are convertible into common shares.

DIFFERENCE BETWEEN EQUITY SHARES &  PREFERENCE SHARES

The following points highlight the main differences between equity and preference shares –

1. DIVIDEND RATE : Preference shares have a fixed dividend rate whereas the dividend rate of Equity shares totally depends upon the earnings of the company.
2. PREFERENTIAL RIGHTS : Preference shares have preferential rights in terms of capital repayment & dividend over equity shares whereas Equity shares do not hold any such preferential rights.
3. VOTING RIGHTS : Preference shareholders do not have any voting rights whereas Equity shareholders can participate in voting and managerial affairs of the company.
4. TRADING IN EXCHANGE :- Preference shares are not traded in Exchange whereas Equity shares are traded in Exchange.

Thus, Equity shares and Preference shares are the two types of share that a company issues.  Both the shares have different features and are suitable for investors with different requirements.