What is the Difference Between Equity Shares and Preference Shares?

The main difference between equity shares and preference shares lies in the ownership rights, dividend pay-outs, voting rights, and risk and return profiles. Here are the key differences between the two:

1. Ownership: Equity shares represent the ownership of a company, while preference shares have a preferential right or claim over the company's profits and assets.
2. Dividend Pay-out: Equity shareholders receive dividends only after the preference shareholders receive their dividends. Preference shareholders have a higher priority when it comes to receiving dividends.
3. Rate of Dividends: Equity share dividend rates are not fixed and are decided by the board of directors after analyzing the company's performance. In contrast, preference shareholders receive dividends at a fixed rate, predefined at a standard share price.
4. Voting Rights: Equity shareholders have voting rights and participate in the management decisions of the company. Preference shareholders, on the other hand, do not have the right to participate in the management decisions.
5. Redemption: Equity shares cannot be redeemed, while preference shares can be redeemed.
6. Convertibility: Equity shares cannot be converted, but preference shares can be converted to equity shares.
7. Arrears of Dividend: Equity shareholders do not receive arrears of dividends, while certain types of preference shareholders are eligible for arrears of dividends.

In summary, equity shares offer ownership rights, voting rights, and dividends that fluctuate based on the company's performance, while preference shares provide fixed dividends, priority in receiving dividends, and do not come with voting rights. The choice between the two depends on the investor's risk-taking capacity and financial goals.

Comparative Table: Equity Shares vs Preference Shares

Here is a table highlighting the key differences between equity shares and preference shares:

Equity shares represent the ownership of a company and offer capital appreciation, while preference shares have preferential rights to the company's profits and assets, providing regular dividend income. Equity shareholders enjoy voting rights and participate in management decisions, whereas preference shareholders do not have these rights. Dividends are paid to equity shareholders only after preference shareholders receive theirs, and the dividend rate for equity shares varies based on the company's earnings. In contrast, preference shareholders have a fixed dividend rate and priority in receiving dividends. Equity shares cannot be redeemed, but preference shares can be redeemed, and they can also be converted to equity shares.