Equity Share vs. Preference Share

Attribute	Equity Share	Preference Share
Type of Share	Equity	Preference
Ownership	Ownership in the company	Ownership with fixed dividend
Voting Rights	Usually have voting rights	No voting rights
Dividend Payment	Dividend paid out of profits	Fixed dividend paid before equity shareholders
Risk	Higher risk, higher potential return	Lower risk, fixed return

Introduction

When a company decides to raise capital, it has the option of issuing different types of shares to investors. Two common types of shares are equity shares and preference shares. Both types of shares have their own unique attributes and benefits. In this article, we will compare the attributes of equity shares and preference shares to help investors understand the differences between the two.

Ownership and Voting Rights

Equity shares represent ownership in a company. When an investor purchases equity shares, they become a part owner of the company and have the right to vote on important company decisions at shareholder meetings. Preference shares, on the other hand, do not typically come with voting rights. This means that preference shareholders do not have a say in company decisions, but they do have a higher claim on company assets in the event of liquidation.

Dividend Payments

One of the key differences between equity shares and preference shares is how dividends are paid out. Equity shareholders receive dividends based on the company's profitability and the decision of the board of directors. This means that equity shareholders may not receive dividends if the company is not profitable. Preference shareholders, on the other hand, are entitled to a fixed dividend payment before any dividends are paid to equity shareholders. This fixed dividend is typically a percentage of the face value of the preference shares.

Risk and Return

Equity shares are considered riskier investments compared to preference shares. This is because equity shareholders are the last in line to receive payments in the event of liquidation. If a company goes bankrupt, equity shareholders may not receive any payments at all. Preference shares, on the other hand, have a higher claim on company assets in the event of liquidation, making them a safer investment option. However, this safety comes at a cost, as preference shareholders typically receive lower returns compared to equity shareholders.

Convertible Features

Preference shares often come with the option to be converted into equity shares at a later date. This feature allows preference shareholders to benefit from any increase in the company's share price. Equity shares, on the other hand, do not have this feature. This means that equity shareholders do not have the option to convert their shares into preference shares at a later date.

Redemption

Preference shares are often issued with a redemption feature, which allows the company to buy back the shares at a predetermined price after a certain period of time. This gives preference shareholders the option to exit their investment at a fixed price. Equity shares, on the other hand, do not have a redemption feature. This means that equity shareholders do not have the option to sell their shares back to the company at a predetermined price.

Conclusion

In conclusion, equity shares and preference shares have their own unique attributes and benefits. Equity shares provide ownership and voting rights in a company, but come with higher risk and potentially higher returns. Preference shares, on the other hand, offer fixed dividend payments, higher claim on company assets, and potentially lower returns. Investors should carefully consider their investment goals and risk tolerance when deciding between equity shares and preference shares.