Differences between Equity Share Capital and Preference Share Capital

What is the meaning of Equity Share Capital?

Equity Share Capital is the funds generated by a company through issuing Equity shares (also known as ordinary shares). It consists of company shares that the owners decide to sell to individual investors and institutions in the stock market. The Equity Shareholders become stakeholders in the organisation, and these investors are eligible for both ownership and voting rights in the company to select their management.

Some of the features of Equity Shares are as follows:

  • Equity Share Capital Remains with the organisation, and the investors can claim it back only when the company winds up their operations. It is like a perpetual source of funding for the organisation.
  • They get a percentage of the company’s profits, but only after preference shareholders get their dividend.
  • The Equity Shareholders do not get a fixed rate of dividend. The dividend amount depends on the surfeit capital with the company after paying the preference shareholders.
  • Equity shareholders get voting rights in the selection of the company’s management.

What is the meaning of Preference Share Capital?

Preference Share Capital is the funds generated by a company through issuing preference shares (also known as Preference stock). Preference Shareholders have the first right to receive dividends even before equity shareholders. They are also part owners of the company, but they do not get any voting rights to select its management. They are entitled to a fixed rate of compensation every time the company decides to declare a dividend. They also have the right to claim repayment of capital if the company dissolves.

Some of the features of Preference Shares are as follows:

  • Preference Shareholders have the first right to claim the company’s assets whenever they decide to wind up their operations.
  • Preference Shareholders have the first claim to their dividend.
  • The Preference Shareholders get a fixed rate of dividend.
  • Preference shareholders do not get voting rights in the selection of the company’s management.
  • Preference Shares have features of both debt and equity investment. They are also known as a hybrid security option for their investors.

Differences between Equity Share Capital and Preference Share Capital

The main differences between Equity Share Capital and Preference Share Capital are as follows:

Preference Share Capital

Equity Share Capital

Definition

Preference Share Capital is the funds that a company has generated by issuing preference shares.

Equity Share Capital is the funds that a company has generated by issuing Equity shares.

Dividend Rate

The Dividend Rate in the case of Preference Share Capital is not changeable.

The Dividend Rate is changeable or fluctuating in the case of Equity Share Capital.

Voting Rights

Preference Shareholders do not have any voting rights in the selection of the management.

Equity Shareholders have voting rights in the selection of the management.

Participation in Management

Preference Shareholders do not have the right to participate in the management decisions.

Equity Shareholders holders have the right to participate in the management decisions.

Claim to assets of the company

Preference Shareholders have a right to claim over the company’s assets whenever they decide to wind up their operations.

Equity Shareholders do not have any right to claim their assets whenever they decide to wind up their operations.

Preference in paying dividend

Preference shareholders get the first preference when the company pays a dividend.

Equity shareholders get second preference when the company pays a dividend.

Types of Shares

The different types of Preference Shares are as follows:

  • Cumulative Preference Shares
  • Participating Preference Shares
  • Redeemable Preference Shares
  • Convertible Preference Shares
  • Non-Cumulative Preference Shares
  • Non-Participating Preference Shares
  • Non-Redeemable Preference Shares
  • Non-Convertible Preference Shares

The different types of Equity Shares are as follows:

  • Authorised Share Capital
  • Issued Share Capital
  • Subscribed Share Capital
  • Paid-up Share Capital
  • Rights Share
  • Bonus Share
  • Sweat Equity Share

Arrears of Dividend

Preference Shareholders are eligible to get arrears of unpaid dividends from previous years. They can get it along with the dividend of the current year, except for non-cumulative preference shares.

Equity Shareholders are not eligible to get arrears of unpaid dividends from previous years.

Convertibility

Preference Shares are eligible to get converted into Equity Shares.

Equity Shares can never be eligible to get converted into Preference Shares.

Risk

Preference Shareholders are at a lower risk compared to Equity Shareholders.

Equity Shareholders are at a higher risk compared to Preference Shareholders.

Conclusion

There are significant differences between Equity Share Capital and Preference Share Capital. Despite that, both these equity instruments are essential for any company looking to raise funds from the general public and institutional investors. These investments are liable to much more risk for investors than debt instruments, but the rewards are also much higher, especially in the case of Equity Shares.

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