Basic differences between Preference share and Equity share

An organization issues two types of shares which include the equity shares  and the preference shares both of which have a different role to play. The former category of shares is also referred to as the ordinary shares and the investors who hold them earn the voting right in the decisions of the company while the latter ones share the major part of dividend distribution. With the preference shares, the dividend is bound to be received at a fixed rate right before any dividend is paid on the equity shares.

Apart from this, one of the major differences between these two kinds of shares is that the dividend that is generated in the case of preference shares is often cumulative in nature while on the other hand the same is not true for the case of equity shares even when they remain unpaid for subsequent years.

During the financial year if a company happens to be forced into the state of liquidation then its assets are sold and the amount that is generated is distributed among the investors depending upon their order of seniority. The ones who enjoy the highest seniority are often paid the full amount that they have invested.

According to experts, when you taking the major decisions related to the capital structure, then you must surely go for a combination of these two shares. The condition with the preference shares is that the investors get the right to hold a portion of the profit. Moreover, they also have the right to receive a premium during the time of redemption. These are often considered as a safe investment the equity shares. In this case, if a company is bound to sell its assets, then the money that is obtained by selling these commodities is given to the investors as they own a certain portion in the company’s profit.

Some of the major differences between the equity shares and the preference shares are as follows:

  • Preference shares can be changed into equity shares but the vice versa is not possible.
  • There is no redemption in the case of equity shares while this is possible in the case of preference shares.
  • Investors who have a portion of the equity shares have the right to vote whereas the preference shareholders do not possess the voting rights.
  • The rate of equity dividend greatly depends upon the profit that is earned by the organization during a given financial year which means that does not stay consistent. On the other hand, the dividend remains consistent in the case of preference shares.
  • During a financial year, if the equity share dividend is not paid or declared then it might get lapse in the same year. On the other hand, the dividend on the preference shares needs to be hoarded up and can be paid in the next financial year apart from the non-cumulative ones.

One thing that needs to be kept in mind before you start investing these shares is that you have sufficient knowledge of the share market beforehand. If you are not prepared beforehand, then there are chances that you might suffer loss. It is desirable to purchase the stocks when their prices are low and sell them when the market price is comparatively higher. Moreover, you should seek out a long-term investment plan as that would earn you great returns in the future.

On a final note, hope you are now well aware of the differences between the equity shares and the preferred share and how they work for the investors in an organization.