You will come across multiple financial terms when you understand the investment market. To understand your smooth investment journey, you must understand the concepts. Although equity share vs preference share is quite similar, both concepts differ. The key distinction is what they provide the shareholders and the dividend payouts they offer.

So, to better understand, let us learn about equity share vs preference share.

Equity Share vs Preference Share - Table of Contents

What are Equity Shares?

An equity share offers voting rights and the dividend rate of equity shares that changes yearly. The dividend rate generally depends on the total amount of profits made by the corporation that year. Because of this, the number of equity shares represents your ownership in the corporation. Due to this, the profit margin varies, and the dividend amount also changes. But keep in mind that you do not receive the best profit; instead, you need to receive a portion of the residual profits that helps to post all expenses and responsibilities to be paid.

What are the Features of Equity Shares?

The features of equity shares are:

• Permanent in Nature: Equity shares are permanent assets of a company and are only returned when the company closes down. 

• Offers Significant Returns: Equity shares help generate significant returns for shareholders. But they are risky investment options. In other words, they can be highly volatile. 

• Offers Dividends: Equity shareholders receive a share of the profits. So, a company can distribute dividends to its shareholders from its profits. But, the company is not obligated to distribute dividends. It can choose not to give dividends if it does not make good profits. 

• Voting Rights: Most equity shareholders have voting rights that allow them to select the people who will govern the corporation. 

• Additional Profits: Equity shareholders can receive a corporation's additional profits. 

• Liquidity: Equity shares are a very liquid investment. The shares can be traded on the stock exchange. In other words, shareholders are not liable for the corporation's debt obligations.

What are the Different Types of Equity Shares?

Following are the different types of Equity shares: 

1. Ordinary Shares: A company issues shares to help raise funds to meet long-term expenditures. 

2. Preference Shares: Preference shares assure the payment of cumulative dividends to investors before the ordinary shareholders. 

3. Bonus Shares: Shares that a corporation issues from its retained earnings. The company issues its profits in the form of bonus shares. 

4. Rights Shares: Companies issue these for specific premium investors. These are done at discounted rates to help raise money for financial needs. 

5. Sweat Equity Shares: Made for directors and employees for their excellent work providing intellectual property rights and value additions to the company. 

6. Employee Stock Options (ESOPs): Companies provide employees with ESOPs as incentives and retention strategies. Employees can purchase shares at a predetermined price in the future date as mandated by the terms of the ESOPs.

What are Preference Shares?

Preference shares are easy to understand as the one that takes precedence over equity shares in aspects such as dividend distribution at the fixed rate and the capital payback in the event of the corporation's collapse. Similar to equity shares, preference shares have investors who own the company but do not have voting rights. But shareholders have a right to vote in other matters that directly affect their rights that are caused due to a reduction in capital or the winding up of the corporation.

What are the Features of Preference Shares?

The preference shares features are:

• They can be easily converted into common stocks: If a shareholder wants to change their holding position, they can easily convert preference shares into predetermined stocks. 

• Dividend Payouts: Preference shares help shareholders receive dividends when other stockholders receive dividends later or may not receive them at all. 

• Dividend Preferences: Preference shareholders can receive dividends first compared to other shareholders. 

• Voting Rights: Entitled to the right to vote in extraordinary events. But generally, they do not have the right to vote. 

• Asset Preference: When it comes to the liquidation of assets of a company, then preference shareholders get priority over others.

What are the Different Types of Preference Shares?

There are nine different types of preference shares, as provided below:

1. Convertible Shares: Shares that can be easily converted into equity shares.

2. Non-Convertible Shares: Shares that cannot be converted into equity shares.

3. Redeemable Shares: Shares can be redeemed or repurchased by issuing companies at fixed rates and dates. These provide companies with a cushion during inflation.

4. Non-Redeemable Shares: These shares cannot be redeemed or repurchased by the issuing company at a fixed date. These shares act as a lifesaver during inflation.

5. Participating Shares: These help shareholders demand a part of the surplus profit during liquidation once dividends are paid to other shareholders.

6. Non-Participating Shares: These shares do not provide shareholders with the added option of earning dividends from surplus profits earned by the corporate, but they receive fixed dividends paid by the company.

7. CumulativeShares: These types of shares provide shareholders with the right to enjoy cumulative dividend payout options from the company even when they do not receive a profit.

8. Non-Cumulative Shares: Do not allow shareholders to collect dividends in arrears. The payout takes place from profits in the current year.

9. Adjustable Shares: The dividend rates are not planned and are influenced by current market rates.

[ Read More About Different Types of Preference Shares ]

Now that we know the definition, types, and features of equity shares vs preference shares, let's take a look at their differences:

Differences Between Equity and Preference Shares

Conclusion

Regarding a contest of equity shares vs preference shares, it can be said that both shareholders benefit differently. Equity shareholders can enjoy voting rights and take part in company decisions, whereas preference shareholders have the upper hand when it comes to the distribution of dividends.

So, depending on a person's financial goals and risk-taking options, investors can choose the best investment option from equity shares vs preference shares.