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Equity Shares vs Preference Shares: Which is Better to Invest?

difference between Equity Shares and Preference Shares

Investing in shares is a great way to build wealth, but not all shares are equal. The two main types of shares are equity and preference shares, each having distinct advantages and disadvantages. Equity shares provide voting rights and a share in the company's profits.

In contrast, preference shares provide a set dividend but little to no control over a company. Knowing how equity shares and preference shares differ is crucial. It provides you with the knowledge to make more informed decisions about your investment and how to increase your returns.

In this article, we take a look at the major differences between equity shares and preference shares.

What are Equity Shares?

Equity shares are ownership in a company. When you buy equity shares, you are a shareholder and have voting rights on major company decisions. Equity shareholders have a right to a part of the company's profit through dividends. However, this depends on the company's profitability.

These shares offer higher potential returns but come with increased market risks. They are ideal for investors seeking long-term capital growth.

Equity Shareholders will have ownership rights in and for the business.
The shareholders have the right to vote on the company's major decisions.
Dividend payouts are not fixed and depend on the company's profits for equity shareholders.

What are Preference Shares?

A preference share is a type of share issued by a company that receives fixed dividends and priority in payouts ahead of equity shares. Preference shareholders do not generally vote in company matters and are unpaid for a certain period. Generally, for two years.

These are unique financial instruments that incorporate aspects of both equity and debt. Preference shares have stable returns. This would be desirable for conservative investors who want income stability and a low-risk investment.

They receive fixed dividends regardless of whether the company has made a profit.
In contrast, preference shareholders get priority in the event of liquidation.
In some cases, preference shares can be converted into equity shares after a set period.

Key Differences Between Equity Shares vs Preference Shares

Equity and preference shares are two major company shares with distinct features. Here's a detailed comparison table highlighting the difference between equity and preference shares:

Aspect	Equity Shares	Preference Shares
Meaning	Equity shares represent company ownership and give shareholders voting rights.	Preference shares provide fixed dividends and priority during liquidation. It does not grant ownership rights.
Return	Returns on equity shares depend on company profits and market performance. Thus leading to higher potential gains.	Preference shares offer stable and fixed returns, regardless of company profits.
Dividend Payout	Equity shareholders receive dividends after preference shareholders, based on available profits.	Preference shareholders receive dividends before equity holders at a fixed rate.
Participation in Management Decisions	Equity shareholders can influence company policies and management decisions through voting.	Preference shareholders cannot take part in management decisions.
Dividend Rate	The dividend rate is not fixed. It varies according to the company's financial performance.	Preference shares carry a predetermined dividend rate, offering consistent income.
Redemption	The company cannot redeem equity shares.	Preference shares are redeemable after a specified period or as per the company's terms.
Capital Repayment	Equity shareholders receive capital repayment after preference shareholders during liquidation.	Preference shareholders have the right to capital repayment before equity holders.
Convertibility	Equity shares are non-convertible into preference shares.	Some preference shares are convertible into equity shares after a certain period.
Voting Rights	Equity shareholders have voting rights on major company decisions.	Preference shareholders generally do not have voting rights unless dividends are unpaid.
Arrears of Dividend	Equity shareholders are not entitled to claim unpaid dividends.	Cumulative preference shareholders can claim arrears of dividends in future periods.
Bonus Shares	Equity shareholders receive bonus shares issued by the company.	Preference shareholders are not eligible for bonus shares.
Investment	Equity shares are suitable for investors seeking higher returns with market-linked risks.	Preference shares are suitable for conservative investors seeking stable income.
Capitalisation	Equity shares help in raising permanent capital through public issuance.	Preference shares improve the company's capital structure without increasing debt.
Financing	Equity shares raise long-term capital without creating debt.	Preference shares raise flexible capital with fixed obligations.
Suitability	Equity shares are ideal for long-term capital growth and wealth creation.	Preference shares are suitable for fixed income and capital protection.
Mandate	Equity shares have no fixed mandate for dividend payments.	Company agreements and shareholder terms govern preference shares.
Liquidation	Equity shareholders are the last to receive payment during company liquidation.	Preference shareholders receive payment before equity holders in case of liquidation.
Bankruptcy	Equity shareholders receive payments after preference shareholders in the case of bankruptcy.	Preference shareholders get preference before equity holders during bankruptcy.
Liquidity	Equity shares are more liquid and traded on stock exchanges.	Preference shares are less liquid due to limited trading options.

Types of Equity Shares

Companies offer various types of equity shares to cater to diverse investor preferences. Below is an overview of seven types of equity shares:

Type of Equity Share	Description
Authorised Share Capital	This is the highest capital value that a company can issue. It must be per the law and stated in the company's constitutional documents.
Issued Share Capital	It is the authorised capital a company has made available to investors. This value represents the entire value of the shares that shareholders currently hold.
Subscribed Share Capital	Subscribed share capital is the part of issued capital that investors have committed to purchasing. It indicates the level of shareholder commitment to buying shares
Paid-Up Capital	Paid-up capital is the total value shareholders have paid for the shares they have subscribed to. It represents the actual capital received by the company.
Bonus Shares	Bonus shares are shares issued to existing shareholders at no cost. Companies use free reserves or retained earnings to distribute bonus shares.
Rights Shares	Rights shares are generally for existing shareholders. They receive it at a discounted price before the company offers it to the public.
Sweat Equity Shares	Companies issue sweat equity shares to employees or directors as a reward. They offer it at a discount or without payment to recognise employee efforts.

Types of Preference Shares

Preference shares have the characteristics of debt and equity. This provides investors with a fixed income that may appreciate over time. They can redeem it for a profit on their shares. There are eight key types of preference shares for investors seeking to invest. The types include:

Type of Preference Share	Description
Convertible Preference Shares	Convertible preference shares let investors change their shares into common shares. This happens after a set period and at a fixed rate. If the value of shares increases and the investor converts those shares at a preset value, he can get a profit.
Non-convertible Preference Shares	These shares come without the right to convert into common shares. In a non-convertible preferred share, the investor will receive fixed dividend payments. Yet, he will not receive equity appreciation of the common shares.
Cumulative Preference Shares	Cumulative preference shares allow shareholders to accumulate unpaid dividends. These preference shares ensure the payment of unpaid dividends from previous periods.
Non-cumulative Preference Shares	Non-cumulative preference shares do not allow the shareholder to accumulate unpaid dividends. If a company does not pay dividends in a year, the shareholders will not get them later.
Redeemable Preference Shares	Companies issue these shares with a predetermined redemption date. They can also issue them at the company's discretion after a certain period. The company must repurchase these shares at a specific price.
Non-redeemable Preference Shares	Non-redeemable preference shares, or perpetual preference shares, do not have a redemption date. They will remain outstanding unless the company liquidates or repurchases them.
Participating Preference Shares	These shares grant shareholders the right to receive extra dividends. This is beyond the fixed percentage. After paying dividends to common shareholders, participating shareholders may receive extra dividends.
Non-participating Preference Shares	Non-participating preference shares only entitle the shareholder to fixed dividend payments. They do not receive extra dividends based on the company's exceeded profit earnings.

Benefits of Equity Shares and Preference Shares

Equity and preference shares are two main types of investments. Each offers different benefits to investors. The table below compares the key advantages of both:

Benefits	Equity Shares	Preference Shares
Potential for Capital Appreciation	If the company's value increases over time, equity shareholders can experience capital gains.	Preference shares offer limited capital appreciation. However, convertible preference shares allow for the conversion to equity shares. Thus benefiting from future growth.
Dividend Income	Equity share dividends always differ, depending on the company's profit and dividend policy. During profitable periods, they can generate hefty incomes.	Fixed dividends belong to preference shareholders. This does not change regardless of whether profits vary over time. This creates an ongoing income for preference holders.
Voting Rights	Equity shareholders generally have voting rights. This allows them to vote on essential company affairs, including the board of directors' decisions.	Generally, preference shareholders do not have voting rights. This is because they invest for income rather than any shareholder governance role.
Liquidity	Equity shares offer better liquidity as they are often traded on stock exchanges. Thus allowing for easy buying and selling of shares.	Preference shares may be less liquid due to lower trade volumes. Thus, making buying and selling these shares more difficult.
Potential Tax Advantages	Depending on jurisdiction, dividends from equity shares may qualify for favourable tax treatment. This enhances after-tax returns.	In some cases, dividends from preference shares may receive favourable tax treatment. This varies by jurisdiction and specific tax laws.
Risk Exposure	Equity shareholders face a high risk because they receive irregular dividends. Also, they get a lower priority in receiving the assets in case of liquidation. Yet, the prospect of a higher return is also realised.	Preference shareholders have a reduced risk profile based on fixed dividends. They have a stronger claim to receive investment in the event of a company's liquidation. This limits the potential for a significant capital gain.

Similarities Between Equity Shares and Preference Shares

Equity and preference shares are two main categories of company shares and offer distinct advantages. Although differing, both have certain similarities. Knowing these similarities can assist an investor in making a sound financial decision. Key similarities include:

1. Ownership in the Company

Both equity and preference shareholders have ownership. This is because they have ownership of shares in the company.

2. Regulated by Laws of the Company

Both equity and preference shares are regulated according to the company's laws. This creates transparency.

3. Tradability in the Stock Market

Individuals can buy and sell shares on the stock market.

4. Capital Loss

Depending on the company's performance, both may sustain a loss on their investment.

5. Right to Transfer Ownership

In a fair market, it is possible to transfer ownership of equity or preference shares to other buyers in the market.

Equity Shares or Preference Shares - Which is a Better Investment Option?

The decision to invest in equity or preference shares depends on your investment objectives and risk tolerance. Equity shares are high-growth assets and carry higher risk and volatility characteristics. They also provide voting rights, and returns are generally variable.

In contrast, preference shares offer fixed, consistent dividends. They are lower-risk investments and are better investments for risk-averse investors. Yet, preference shareholders do not have voting rights and have a low potential for capital gain.

Hence, equity shares are best for risk-tolerant investors to earn more returns. In contrast, preference shares are best for low-risk investors who desire the greatest certainty of income.

Understanding the differences between equity and preference shares is crucial. Equity shares come with more potential for growth and voting rights. In contrast, preference shares offer security in the form of fixed dividends. By balancing the benefits of both shares, an investor can create a diversified portfolio that suits their goals and risk profile.

Disclaimer: The information provided on this website is for general informational purposes only and should not be construed as financial, investment, or legal advice. While we strive to provide accurate and up-to-date content, we do not guarantee the completeness, reliability, or suitability of the information for your specific needs.

We do not promote or endorse any financial product or service mentioned in these articles. Readers are advised to conduct their own research, consult with financial experts, and make informed decisions based on their unique financial circumstances. Any reliance you place on the information provided here is strictly at your own risk.

FAQs about Equity Shares vs Preference Shares

What are the differences between equity shares and preference shares?

Equity shares entail rights of ownership, voting rights, and variable dividends. In contrast, preference shares entail fixed dividends and priority over liquidation. They do not have any voting rights.

Which shares are appropriate for long-term investment: equity or preference shares?

Equity shares are most suitable for long-term investment. This is because of their ability to appreciate their capital value. Preference shares are most suitable for conservative investors who want a fixed return.

Are preference shareholders paid dividends even if the company is not profitable?

Yes, preference shareholders receive fixed dividends irrespective of the profits of the company. The unpaid dividends are not carried forward to future years in the case of non-cumulative preference shares.

Are preference shares convertible into equity shares?

Yes, one can convert their convertible preference shares into equity shares after a specified period.

Are the equity shareholders paid first in case of company liquidation?

No, the preference shareholders get priority first in case of liquidation. The equity shareholders receive payment only after paying the shareholders' liabilities and preferences.

What are the risks of investing in equity shares?

Equity shares involve market risk. Their value fluctuates based on company performance, industry trends, and economic conditions. Additionally, dividends are not guaranteed.

Are preference shares traded on stock exchanges?

While you can trade some preference shares on stock exchanges, they are less liquid than equity shares. Hence, it becomes challenging to sell or buy them within a short period.

Can companies issue both equity and preference shares?

Yes, generally, the companies issue both types of shares. This is to offset their capital structure and to entice various categories of investors.

How are preference share dividends calculated?

Preference share dividends are constant. They are typically given as a percentage of the face value of the share (e.g., 8% preference shares will pay 8% of the face value of the share every year).

Which shares would be most suitable for risk-averse investors?

Preference shares are appropriate for risk-conscious investors. They offer fixed income and are repaid before equity shareholders in the event of liquidation.

Do equity shareholders have the right to take part in the company's decisions?

Yes, equity shareholders can vote on major decisions of the company. This includes electing the board of directors and authorising the major corporate policies.

Do preference shareholders get bonus shares?

No, preference shareholders are not eligible to get bonus shares. Bonus shares are usually given only to equity shareholders.

Are the taxation of dividends on equity and preference shares different?

In most cases, dividends on equity shares can be eligible for lower tax rates. Whereas, preference share dividends might be subject to normal income taxation.

Can a firm re-purchase its preference shares?

Yes, firms can re-purchase redeemable preference shares after a specific time, as agreed in the terms of the issue. However, non-redeemable preference shares remain outstanding forever unless otherwise stated.

Which is riskier: equity shares vs preference shares?

Generally, equity shares are riskier than preference shares. This is due to more value fluctuations, market conditions, and the company's performance.

What are the advantages of preference shares over equity shares?

Preference Shares offer various advantages over equity shares. This includes priority in dividend payments, lower risks, and fixed dividends.

Which is better, equity shares or preference shares?

The choice between equity and preference shares depends on individual goals and preferences. Equity shares are better for investors seeking higher returns and willing to take on more risk. Preference shares suit risk-averse investors who prefer stable income with lower market volatility.

Which share has a higher claim on assets during liquidation, equity or preference shares?

During a company's liquidation, preference shares have a higher claim on assets than equity shares.

Disclaimer

This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.

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Author: Team Digit

Last updated: 20-06-2025