In this article, we will discuss the topic ‘Distinguish between Equity Shares and Preference Shares‘. Here, we have highlighted 10 important points. From definition to voting rights all aspects have been covered.
Distinguish between equity shares and preference shares.
The differences between Equity shares and Preferences shares are as follows:
| Basis | Equity Shares | Preference Shares |
|---|---|---|
| 1. Definition | Equity shares refer to those shares which do not carry any preferential right in the payment of annual dividend and repayment of capital in the event of liquidation. | Preference shares refer to those shares which carry preferential right in the payment of annual dividend and repayment of capital in the event of liquidation. |
| 2. Dividend right | Dividend is paid on Equity shares after it is paid on Preference shares. | Dividend is paid on Preference shares before it is paid on Equity Shares. |
| 3. Dividend rate | Rate of dividend is not fixed. Rate of dividend is decided by the Board of Directors and approved by the shareholders. | Rate of dividend is predetermined and fixed. |
| 4. Arrear Dividend | If dividend is not declared during the year, it is not accumulated to be paid in the coming years. | If the Preference Shares are Cumulative in nature, arrear dividend is paid before dividend is paid on Equity shares. |
| 5. Convertibility | Equity shares not convertible. | In case of Convertible Preference shares, it can be converted to Equity shares. |
| 6. Redemption | A company may buy-back its Equity shares | Redeemable Preference Shares may be redeemed. |
| 7. Voting Rights | Equity shareholders have voting rights in all occasions. | Preference shareholders have voting rights only in special occasions. |
| 8. Repayment of Capital | On winding up, the Equity share capital is repaid after the Preference share capital is paid. | On winding up, the Preference share capital is repaid before the Equity share capital is paid. |
| 9. Participation right | Equity shareholders have the right to participate in the management of the company. | Preference shareholders do not have a right to participate in the management of the company. |
| 10. Formation of Company | A company can be formed with only Equity shares. | A company with only Preference shares cannot be formed. |
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