18 Jun, 2025
3 mins read
When investing in the stock market, understanding the types of shares a company issues can help you grasp its structure and your rights as a shareholder. Two common categories of shares are Equity Shares and Preference Shares. While both represent ownership in a company, they come with different rights and responsibilities. In this blog, we break down the core differences between the two in simple terms.
Equity shares, also known as ordinary shares, represent ownership in a company. When you purchase equity shares, you become a part-owner of the company and gain voting rights in crucial decisions such as electing the board of directors or approving mergers.
Equity shareholders:
Bear the highest risk, as they are paid after all obligations are met in case of liquidation.
Enjoy voting rights, giving them influence over corporate decisions.
Receive dividends, but these are not fixed and depend on the company's profits.
Benefit from capital appreciation as the value of shares may increase over time.
In short, equity shares are suitable for those who are willing to take higher risks for potentially higher returns.
Preference shares are a hybrid between equity and debt instruments. While they signify ownership, they come with fixed dividend benefits and are prioritised over equity shares in dividend distribution and asset liquidation.
Preference shareholders:
Do not usually have voting rights in company matters.
Receive a fixed dividend, regardless of the company’s profitability.
Have priority over equity shareholders in receiving dividends and repayment in case of liquidation.
May come in different forms, such as cumulative, non-cumulative, redeemable, or convertible shares.
This makes preference shares appealing to conservative investors seeking stable returns without being involved in the day-to-day decisions of the company.
|
Feature |
Equity Shares |
Preference Shares |
|---|---|---|
|
Ownership |
Represents ownership with voting rights |
Represents ownership but usually without voting rights |
|
Dividend |
Variable and not guaranteed; depends on company’s profit |
Fixed and predetermined; paid even when profits are low (subject to availability) |
|
Dividend Priority |
Paid after preference shareholders |
Paid before equity shareholders |
|
Voting Rights |
Yes, shareholders can vote on major decisions |
Generally no voting rights, except in special circumstances |
|
Risk Level |
Higher, as returns depend on performance |
Lower, due to fixed income and payment priority |
|
Capital Repayment Priority |
Last to be paid in case of liquidation |
Priority over equity shareholders during liquidation |
|
Convertibility |
Non-convertible |
May be convertible to equity shares depending on terms |
|
Profit Participation |
Eligible to share in surplus profits after all obligations |
Usually limited to fixed dividend, unless classified as participating shares |
There’s no one-size-fits-all answer. The better choice depends on your investment goals:
Equity Shares: Suitable for long-term investors aiming for capital gains and willing to accept higher risk for potential rewards.
Preference Shares: Ideal for conservative investors seeking regular income and lower risk.
Many companies issue both to appeal to a wider range of investors.
Equity and preference shares serve different purposes in a company’s capital structure. Equity shares offer control and growth potential, while preference shares provide stability and priority in returns. Understanding these differences can help investors make informed decisions based on their risk appetite and income expectations.
Equity shares offer voting rights and variable dividends, while preference shares offer fixed dividends and priority in payments but usually no voting rights.
Preference shareholders are paid first, both in terms of dividends and in the event of a company’s liquidation.
Yes, companies often issue both types to meet diverse investor needs and to maintain a balanced capital structure.
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Planning your stock market activities ahead of time is essential…
28 May, 2025
3 mins read
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