Key Differences Between Preference and Equity Shares
Investment in shares helps investors to build a great amount of wealth over time. However, investors must understand the importance of research-based investment and learn about different types of shares to make sound decisions. Preference and equity shares are two main categories of shares that investors invest in. Differentiated based on investor risk appetites, investment objectives, and overall benefits, investors must understand the difference between a preference share and an equity share. Let’s learn about the meaning of preference and equity shares:
Preference shares also known as preferred stock offer a fixed income to investors in terms of fixed dividends irrespective of the profitability of the company. Moreover, in the case of company liquidation, owners of preference shares receive their capital investment after the liquidation of company assets. In other words, the owner of a preference share receives preference over other shareholders and investors in case of liquidation.
Equity shares or ordinary shares represent the share capital of the company that offers voting rights to its owners. The investors of ordinary equity shares can participate in company decision-making. However, they receive variable dividends based on the profits generated in a quarter or a year. Moreover, they are last to receive compensation if the company owners decide to liquidate company assets.
The following points enumerate the key differences between equity and preference shares that every investor must understand and be aware of:
Risk appetite:
Preference shares are suitable for investors who are conservative and have a low-risk appetite. They receive fixed dividends irrespective of the profits generated by the company. Moreover, the owners of preference shares are protected in case of company liquidation.
Equity shares on the other hand should be opted for by the investors with a high-risk appetite. They receive a variable dividend that fluctuates according to profits generated. Moreover, they receive residual claims in case of company liquidation.
Voting Power:
Preference share owners do not receive any voting rights. They cannot participate in the company’s decision-making process. Equity share owners receive voting rights. They can participate actively in the decision-making process and other company-related matters.
Growth potential:
Investment in equity shares offers better growth potential in terms of capital appreciation and dividend payout. On the other hand, preference shares investors receive fixed dividends with limited room for growth.
Returns:
Preference shares serve as a mix of debt and equity where the investors receive a fixed sum as dividends along with safety on investment. However, the total returns are less as compared to equity shares.
Equity share investment offers better returns in the long run due to capital appreciation that ultimately depends on the profitability of the company. Investors even receive dividends that fluctuate due to changes in company revenue and profits.
Final Words
Preference shares issued by a company are known for their various types which include convertible, non-convertible redeemable, etc. Investors can easily start their investment journey by opening their demat account to select and buy shares of a prestigious company. Moreover, a perfectly well-balanced investment portfolio can be built through a selection of both equity and preference shares for diversification and safety.
