Difference between equity and preference shares
Difference between Equity & Preference Shares
The following are some of the difference between equity shares and preference shares.
| Points of difference | Equity Shares | Preference Shares |
|---|---|---|
| 1. Term of financing | Used as a method of long term financing | Used for both long term and medium term financing. |
| 2. Nature of return | Rate of return is fluctuating, depending upon the earning | Dividend at fixed rate may be paid or accumulated. |
| 3. Owners | Equity shareholders are the owners. They have voting rights. | These shareholders are not owners. They have no voting rights. |
| 4. Reedeemability | They are not subject to redemption during the lifetime of the company. | It can be redeemed after achieving the purpose or at the end of a certain period. |
| 5. Type of Investors | Suitable for those investors who are adventurous by nature. | It has appeal for relatively less adventurous investors. |
| 6. Right of receiving dividend | Residual claimant. Rank next to preference shares. | Entitled for first preference |
| 7. Right of receiving back invested capital during liquidation. | Entitled for first preference | Entitled for first preference |
| 8. Financial burden | Payment of equity dividends is optional. It is dependent on the discretion of the Board of Directors. Therefore there is no fixed financial commitment. | Payment ofprefetence dividend is a fixed financial commitment. |
| 9. Voting rights | Enjoy voting rights | Do not enjoy voting rights |
| 10. Reduction of capital | By reorganization | By repayment |
| 11. Denomination | Generally of lower denomination. | Generally of higher denomination. |
| 12. Type ofinvestors. | Even small investors can invest because of the lower denomination. | Preferred by medium and large investors. Small investors would find it difficult to invest because of the higher denomination. |
| 13. Borrowing capacity | Strengthens borrowing capacity. | Reduces borrowing capacity. |
| 14. Capitalization | There are chances for over-capitalisaton. | Lesser chances for over-capitalization. |
The above table lists some of the differences between equity & pref shares.
