Understanding the differences between equity share and preference share is crucial for investors and those interested in the world of stocks and shares. This article will delve into the definitions, examples, uses, and key differences between equity share and preference share, enabling readers to make informed investment decisions.
Equity shares, also known as ordinary shares or common shares, represent ownership in a company. By holding equity shares, shareholders become part-owners of the business and have the right to vote in company decisions, participate in profits, and receive dividends.
For example, if a company has issued 1,000 equity shares, an individual holding 100 shares will have a 10% ownership stake in the company.
Equity shares serve as a way for companies to raise capital for expansion, research, development, or other business activities. Investors purchase equity shares with the expectation of capital appreciation and dividends.
Preference shares, also known as preferred shares, carry certain preferential rights compared to equity shares. These shares provide a fixed rate of dividend to their holders before any dividend payment is made to equity shareholders. They have a higher claim on the company’s assets and income.
For example, a company may issue preference shares with a fixed dividend rate of 8% per annum, which will be paid to preference shareholders before distributing the remaining profits to equity shareholders.
Preference shares are often favored by risk-averse investors seeking a regular income stream through fixed dividends. Companies can use preference shares to attract investors who prefer stable returns without actively participating in decision-making.
|Holders have voting rights and control in decision-making.
|Holders do not have voting rights and have limited control in decision-making.
|Dividends are distributed after preference shareholders receive their fixed dividends.
|Preference shareholders receive fixed dividends before equity shareholders.
|Claim on Assets
|Equity shareholders have residual claim on company assets after preference shareholders.
|Preference shareholders have a higher claim on company assets compared to equity shareholders.
|Risk and Return
|Equity shares carry higher risk and potential for higher returns.
|Preference shares are less risky and offer stable returns.
|Equity shareholders have the right to participate in the management of the company.
|Preference shareholders do not actively participate in the management of the company.
|Equity shares are not redeemable and have no maturity period.
|Preference shares can be redeemable after a certain period or at the company’s discretion.
|Priority in Liquidation
|Equity shareholders have the lowest priority in case of company liquidation.
|Preference shareholders have higher priority in payment during company liquidation.
|Conversion to Equity
|Equity shares cannot be converted into preference shares.
|Preference shares may have an option to convert into equity shares.
|Equity shares do not have fixed returns.
|Preference shares offer fixed dividend payments.
|Dividends received by equity shareholders are tax-free in certain jurisdictions.
|Dividends received by preference shareholders may be subject to tax.
In conclusion, equity shares and preference shares have distinct characteristics and serve different purposes for investors and companies. Equity shares provide ownership rights, voting power, and potential for higher returns, while preference shares offer fixed dividends and higher priority in liquidation. Understanding these differences is essential for making informed investment decisions.
People Also Ask
Q: What is the difference between equity share and preference share?
A: The main difference lies in ownership rights, dividend distribution, claim on assets, risk-return profile, and participation in decision-making.
Q: Which is riskier – equity share or preference share?
A: Equity shares carry higher risk potential but also come with the possibility of higher returns. Preference shares, on the other hand, are less risky and offer stable returns.
Q: Can preference shares be converted into equity shares?
A: In some cases, preference shares may be convertible into equity shares based on the terms and conditions set by the company.
Q: Do equity shareholders receive fixed dividends?
A: No, dividends for equity shareholders are not fixed and depend on the company’s profitability and decisions made by the board of directors.
Q: Are dividends received by preference shareholders tax-free?
A: The tax treatment of dividends received by preference shareholders varies depending on the jurisdiction and tax regulations in place.