Have you ever thought of investing in the stock market? Well, if so, then you need to understand the types of securities that are there. Of these, equity shares and preference shares hold a prominent place for investors.
Investing in either offers you an opportunity to own a part of the company. But the main difference lies in their features and benefits that you get as an investor.
This is why we bring you this guide that highlights the key difference between equity shares and preference shares. Explore everything you need here and make an informed investment decision in no time.
What Are Equity Shares?
When it comes to investing, equity shares are indeed the first thing you might come across. These are the shares of the company which allows you to own a part of the company as well. When you buy them, you become an equity shareholder.
You will enjoy voting rights and will earn from the price movements of the stock on NSE and BSE. They do carry a substantial amount of risk as well. But they also offer you unlimited growth potential through rising share prices and dividends.
The common types of the equity shares include ordinary, bonus, rights, sweat, voting, and non-voting shares. This makes equity shares popular among investors seeking long-term wealth creation.
Features of Equity Shares
Equity shares come with distinct features that separate them from preference shares:
- Ownership Rights: Equity shareholders are considered true owners of the company.
- Voting Rights: They can participate in company decisions and elect the board of directors.
- Residual Claim: In case of liquidation, they are paid after preference shareholders and creditors.
- Variable Dividends: Dividends are not fixed and depend entirely on profits.
- No Maturity: Equity shares are permanent. They do not have a repayment date.
- High Risk, High Reward: The shares offer high risk and volatility. But if you want wealth building, these are great choices.
Pros of Equity Shares
- Ownership and Control: Equity shareholders have the power to vote and so influence the decisions of the company as well.
- Potential for Capital Appreciation: Changes in the share price would lead to capital building as well.
- Dividend Earnings: You might get a dividend on your shares which is an additional earning apart from profits.
- Liquidity: Since the shares are listed on NSE and BSE, you can easily sell them when you wish.
- Inflation Protection: Over the long term, equity investments often beat inflation.
Cons of Equity Shares
- Market Volatility: Prices fluctuation based on market conditions can lead to losses.
- Uncertain Dividends: Companies are not obligated to pay dividends every year.
- Residual Status: In liquidation, equity shareholders are the last to be paid.
- Ownership Dilution: Issue of new shares reduces existing shareholders’ stake.
- Requires Patience: Returns are often realised only in the long run.
Read Also: Difference Between Shares and Stocks
What Are Preference Shares?
Preference shares are a type of ownership security. It is where the shareholders get some kind of preferential rights in the company. Though they do not have the voting rights, yet they have some rights which are better as compared to the rest.
A preference shareholder gets priority when it comes to receiving dividends and repayment of capital in case of liquidation. They have limited control over company decisions.
The common types include cumulative, non-cumulative, redeemable, non-redeemable, convertible, non-convertible, participating, and non-participating.
Preference shares are often seen as a mix between equity and debt. This is why they offer steady income through fixed dividends with lower risk.
Features of Preference Shares
Preference shares carry unique features that make them distinct from equity shares:
- Fixed Dividend: Preference shareholders are entitled to a fixed dividend, regardless of profits.
- Priority Claim: They are paid before equity shareholders during profit distribution or liquidation.
- Limited Voting Rights: They generally cannot vote. But there are special circumstances where they can.
- Hybrid Nature: They combine features of debt and equity both.
- Lower Risk: They provide more stability. This makes them suitable for conservative investors.
Pros of Preference Shares
- Steady Income: Preference shareholders receive fixed dividends regularly.
- Priority in Payment: They get the dividend before the rest. They have priority in liquidation as well.
- Lower Risk: They face less risk due to guaranteed returns.
- Hybrid Advantage: You get both ownership and debt advantage.
- Suitable for Risk-Averse Investors: Ideal for those looking for security rather than high growth.
Cons of Preference Shares
- No Voting Rights: There is no say in the decision making at all.
- Limited Growth: Dividends are fixed. So the growth chances are limited.
- Redeemable Nature: Some preference shares may be recalled by the company after a certain period.
- Less Liquidity: They are not as actively traded as equity shares in stock markets.
- Lower Returns in Long Term: Compared to equity, preference shares offer modest wealth creation.
Read Also: Difference Between Bonds and Stocks
Equity Shares Vs Preference Shares
Both equity shares and preference shares represent ownership in a company. But there is a difference between the two that you must know. Here are differences to know:
| Aspect | Equity Shares | Preference Shares |
|---|---|---|
| Ownership | Equity shareholders are considered the real owners of the company with full control rights | Preference shareholders have partial ownership with priority in dividends and repayment |
| Voting Rights | Equity shareholders have voting rights on company matters | Preference shareholders generally do not have voting rights except in special cases |
| Dividend | Dividend is variable and depends on company profits | Dividend is fixed and paid before equity shareholders |
| Risk | Higher risk due to market fluctuations and residual claims in liquidation | Lower risk as they enjoy priority in payment |
| Capital Repayment | Equity shareholders are paid last during liquidation | Preference shareholders are repaid before equity shareholders |
| Returns | Potentially high due to capital appreciation and variable dividends | Limited to fixed dividends with modest growth |
| Liquidity | Equity shares are highly liquid and widely traded | Preference shares are less liquid in comparison |
| Convertibility | Equity shares cannot be converted into preference shares | Preference shares can sometimes be converted into equity shares if specified by the company |
| Redeemability | Equity shares are permanent and cannot be redeemed | Some preference shares can be redeemed after a fixed period |
| Priority in Assets | Equity shareholders have claim over assets only after creditors and preference shareholders are paid | Preference shareholders have a higher claim on assets compared to equity shareholders |
Read Also: Difference Between Trading and Investing
Conclusion
The difference between equity shares and preference shares is very important to know. While both have ownership in the company, their nature is unique. Their risk and return capacity also differ.
Understanding this will allow you to make the right investment call which is important to avoid losses. Both offer growth and a chance to build wealth as well. As an investor, the choice depends on whether you seek long-term capital growth or fixed returns with lower risk.
But to start investing in these, you need a great platform. This is where Pocketful can guide you with expert resources and tools to make informed decisions. Start your investment journey today with Pocketful.
Frequently Asked Questions (FAQs)
Who should invest in equity shares?
Equity shares are better suited for investors who can take higher risk, stay invested for the long term, and aim for capital appreciation along with dividend income.
Who should invest in preference shares?
Preference shares are ideal for conservative investors who prefer fixed income and lower risk, even if it means limited growth opportunities.
Can a company issue both equity and preference shares?
Yes, companies often issue both. Equity shares form the base ownership, while preference shares are used to raise capital with fixed return obligations.
Do preference shareholders ever get voting rights?
Generally no, but preference shareholders may get voting rights if their dividend payments are delayed for a specified period or in special circumstances defined by law.
Are preference shares traded on stock exchanges like equity shares?
Some preference shares are listed, but they are not as widely traded as equity shares. This makes them less liquid compared to equities.
