If you have ever thought about investing in a company, you have probably come across the words equity share and preference share. Both give you a slice of ownership in a business, but the rights and rewards they offer are quite different.
To someone new to the market, the terminology might sound complicated, but once you understand the basics, it is actually easy. The Companies Act, 2013, lays down the ground rules for how companies in India can issue and manage shares. It allows two broad categories, equity and preference, each with its own characteristics.
- Equity shareholders have full voting power in company meetings.
- Preference shareholders can vote only on issues that directly affect their rights, or when the company has failed to pay dividends for at least two years.
- Preference shares generally need to be redeemable within twenty years, except when issued by infrastructure firms that require longer-term capital.
- A company can decide the exact terms – such as whether preference shares will be cumulative, redeemable, or convertible – but those terms must be spelt out in the issue agreement.
Equity Shares
Equity shares form the backbone of a company’s capital. When you buy them, you are not just lending money – you are buying a genuine ownership stake. The number of shares you hold determines your percentage of ownership.
Main Characteristics
- Right to Vote: Equity shareholders can vote on important corporate matters like electing directors, approving mergers, or reviewing annual accounts. It’s their way of having a say in how the company is run.
- Uncertain Dividend: There’s no fixed dividend rate. If the company performs well, the board may declare a healthy payout; if profits are weak, shareholders might get nothing.
- Last Claim on Assets: Should the company shut down, equity holders are paid only after all debts, loans, and preference shareholders have been settled.
- Potential for Growth: As the company expands and profits rise, the value of its equity shares can increase substantially. Investors often earn more from this price appreciation than from dividends.
- Permanent Capital: Equity shares stay with the company unless investors sell them on the stock market. They aren’t redeemed like a loan or bond.
Equity shares, therefore, appeal to people who can tolerate market ups and downs and are aiming for long-term growth rather than steady income.
Preference Shares
Preference shares live up to their name: they enjoy “preference” over equity shareholders in certain aspects. Holders still own part of the company, but their participation is more financial than managerial. They are sometimes called hybrid securities, because they combine features of both equity (ownership) and debt (fixed returns).
Main Features
- First Right to Dividends: Preference shareholders get paid before any dividend goes to equity holders. Their dividend rate is usually fixed, which gives them a predictable income stream.
- Priority in Repayment: If the company ever faces liquidation, preference shareholders are repaid after creditors but ahead of equity shareholders.
- Limited or No Vote: They typically don’t get to vote on company affairs unless an issue directly concerns them or unpaid dividends persist.
- Redeemable or Convertible Options: Some preference shares can be bought back by the company after a set period (redeemable), while others can be converted into equity shares later (convertible).
- Lower Risk, Modest Reward: Because their dividends are fixed and their repayment priority is higher, preference shares carry less risk. But they also offer limited scope for big gains.
Types of Preference Shares
Preference shares come in different forms, each tailored to a specific kind of investor or business need. The main types include:
1. Cumulative vs Non-Cumulative
- Cumulative preference shares accumulate unpaid dividends, which must be cleared later.
- Non-cumulative ones lose any dividend for the year it isn’t declared.
2. Participating vs Non-Participating
- Participating shares can earn extra dividends if the company performs exceptionally well.
- Non-participating shares receive only their fixed dividend, nothing more.
3. Convertible vs Non-Convertible
- Convertible preference shares can turn into equity after a set time or event.
- Non-convertible shares remain preference shares until redemption.
4. Redeemable vs Irredeemable
- Redeemable shares are repurchased by the company after a specified period.
- Irredeemable shares used to exist but are now largely phased out under Indian law.
Equity Shares Vs Preference Shares
| Aspect | Equity Shares | Preference Shares |
| Ownership Rights | Full ownership with management say | Ownership with financial preference only |
| Voting Rights | Yes, on all matters | Usually none, except on special issues |
| Dividend | Variable, depends on profits | Fixed and paid before equity holders |
| Priority During Liquidation | Last to receive payment | Paid before equity holders |
| Convertibility | Normally not convertible | Often redeemable or convertible |
| Risk–Return Profile | Higher risk, higher return | Lower risk, limited return |
| Capital Appreciation | Can rise sharply with company growth | Mostly stable, little appreciation |
| Bonus or Rights Issues | Eligible | Generally not eligible |
| Best Suited For | Investors seeking growth | Investors seeking regular income |
Points Worth Remembering
- Liquidity: Equity shares are actively traded on stock exchanges, while preference shares are often illiquid and held until redemption.
- Tax Treatment: Dividends from both are taxable, but long-term capital gains on equity can enjoy preferential tax rates.
- Control: Equity holders shape company policy; preference holders rarely influence management.
- Market Behaviour: Equity values fluctuate with market sentiment; preference shares remain relatively stable.
In a Nutshell
Both kinds of shares play vital roles in how companies raise money and how investors build wealth.
- Equity shares represent true ownership, decision-making power, and the chance for substantial gains – but they also carry greater risk.
- Preference shares provide a cushion of security, offering steady returns and repayment priority, though with limited control and growth potential.
For new investors in India, understanding this difference can make the stock market far less intimidating. If you dream of growing your wealth over the years, equity shares may be your route. If you prefer peace of mind and predictable earnings, preference shares could fit better.
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