Difference Between Equity Shares And Preference Shares And Meaning Of Equity Shares And Preference Shares

What is the Meaning of equity shares and preference shares and What are the difference between equity shares and preference shares ?

 

Meaning Of Shares Types & Difference :

MEANING OF EQUITY SHARES –

As per companies Act 1956, the shares that are not preference shares are equity shares. The equity shareholders are the real owners of the company. They have a voting right, by using such a right they elects the Board of Directors. The board of directors manages the business affairs on behalf and in the interest of shareholders. The equity shareholders gets the dividend at a fluctuating rate. They can enjoy the benefit of “ Trading on equity “ . They gets dividend only after the dividend is paid to Preference shareholders. The equity capital is not redeemed / repaid until the company is liquidated. In the event of liquidation equity shareholders capital is repaid after all the payments are made to creditors and Preference shareholders. Therefore the ultimate risk goes to equity shareholders and so they are called the real owners.

 

MEANING OF PREFERENCE SHARES –

Preference shares are those shares which carry the rights and privileges over the equity shares in respect of :

• Payment of dividend.
• Repayment / refund of capital in the event of liquidation.

The rate the dividend on preference shares is fixed rate, before paying the dividend on equity shares. In the event of liquidation the preference share capital is refunded after the payment of unsecured creditors, but before the repayment of equity share capital.

 

Difference Between Equity Shares And Preference Shares –

 

Equity shares :

 

• Dividend is paid at a fluctuating rate.
• Equity shareholders carries no priority over the preference shareholders.
• Equity shareholders are the real owners of the company, and they have a voting right.
• After payment of dividend at a fixed rate to the Pref. Shareholders, the full remaining profit belongs to equity shareholders Therefore they enjoy higher dividend as compared to pref. Shareholders. This is called “ Trading on equity “
• There is always a high risk in case of equity shares with regards to income and repayment of capital.
• Equity shares are not redeemed during the lifetime of company. They can be redeemed only at the time of liquidation. If funds are available.

 

Preference Shares :

 

• Dividend is paid at a fixed rate to preference shareholders.
• Preference shareholders carries the priority over the equity shareholders for

A – To receive the dividend before equity shareholders.

B – To get the capital refunded before the equity shareholders, in the event of liquidation along with arrears of dividend on cumulative Pref. Shares, if any.

• There is no voting right for Preference shareholders, except in the issues affecting their interests.
• The rate of dividend on pref. Shares is fixed. So they can not except higher returns.
• As compared to equity shares Pref. Shares carries lower risk.
• Redeemable Pref. Shares are redeemed after the expiry of a fixed period.