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Difference Between Equity Share And Preference Share

Difference Between Equity Share And Preference Share – Hello friends, welcome to pdffiles. Today we are going to share Difference Between Equity Share And Preference Share and after that we will discuss the meaning of both Equity Shares and Preference Shares.

Difference Between Equity Share And Preference Share

Sr. No.Basis Of Difference Equity Share Preference Share
1Right of Dividend Dividend is paid if a part of profit remains after the holders of preference shares have been paid. The holders of these shares have the first right to receive the dividend, i.e. the shareholders get the dividend before it is paid to equity shareholders.
2Return of Capital The shareholders are returned the capital after the capital has been returned to preference shareholders-if there is any remaining capital-in case of winding up. The shareholders have the first right to receive the return of capital in case of winding up of the company.
3Rate of Dividend The rate of dividend is not defined. The rate can be more if the company makes good profit, it can be less, or there can be no dividend, if the company makes less profit, or does not make any profit. The rate of dividend is defined, according to the provisions in the company’s articles, at the time of allotment. The rate cannot be increased-even if the company makes extraordinary profit.
4Accumulation of Dividend There is no accumulation of dividend. If the shareholders do not receive any dividend in any year, it is not paid in any subsequent year. If the shareholders do not receive a dividend in any year, it is accumulated for every year it is unpaid, and the accumulated dividend is paid when the company makes a profit.
5Redemption The shares cannot be redeemed during the company’s lifetime-it can be done only on the winding up of the company. The shares can be redeemed by notice after a specified period stated in the articles of the company.
6Voting Rights The shareholders have the right to vote and participate in the company’s management. Such right to vote is acquired when the shareholders buy the company’s shares. The shareholders have the right to vote in some special situation-they cannot vote on all the resolutions of the company.
7Necessity It is necessary for every company having a share capital to issue equity shares. It is not necessary for a company with share capital to issue preference shares.
8Types Equity shares are only of one type. Preference shares can be of various types.
9Face Value The face value of equity shares is less The face value of preference shares is more

1.Equity Shares

An equity share is also called an ordinary’ share. According to Section 43 of the Companies Act, 2013 all shares of a company which are not preference shares are equity or ordinary shares. Equity shares constitute the major portion of the share of a company having share capital. The dividend on equity shares, and the return of capital in case of winding up of the company, is paid on equity shares after it has been paid on preference shares.

After having paid the dividend to preferential shareholders (if any) at a fixed rate, the remaining profit of the company is distributed to its equity shareholders. Equity shareholders of a company with share capital get a share of the company’s profit only if, after the dividend has been paid to preference shareholders, there is any profit remaining with the company. If no part of the profit is left with the company after having paid dividend to preferential shareholders, the holders of equity share get no dividend. This is the reason the capital invested in equity shares is often referred to as risk capital’. the fate of equity shareholders of a company is directly linked to whether or not the company is successful in its business. If the company does well and makes a profit, the equity shareholders get a dividend; if it does not the risk is that of equity shareholders. If the company does very well and makes extraordinary not, the risk is also that of equity shareholders. If the company does very well and makes extraordinary profit, the biggest gainers are the equity shareholders. This is the first types of shares.

In contrast to this, the rate of dividend for the holders of equity shares is not pre-defined, and is defined only by the directors of the company-which implies that, even if the company makes substantial profit, and the directors have recommended that a major part of the profit goes to the holders of the preference shares, the holders of equity shares get almost nothing, Likewise, the capital return in the eve of the company being wound up is made first to the holders of preferential shares and then to the holders of equity shares.

Must Read – Meaning AND Definition Of Shares And Types Of Shares
Must Read – Difference Between Stock And Share

2. Preference Shares

This is the second types of shares. These are the shares that have referential rights as to the payment of dividend and return of capital on winding up of the company. The holders of preference shares have the prior right to receive the dividend at a fixed rate. They receive the dividend before any dividend is paid to holders of other classes of shares. The rate of the dividend is fixed, under the provisions of the Act, when the shares are issued. The shareholders of preference shares are not entitled to any additional dividend than what is fixed at the time of the allotment of shares, no matter how much profit the company makes. By preferential right in respect of repayment of capital’ is meant that, in the first instance, the capital is repaid to the holders of preferential shares among the company’s shareholders. If there is any amount of capital remaining with the company after such repayment, it is paid to the holders of other classes of shares.

It is clear from what has been said that only the shares that have the above two characteristics are preferential shares. Even if one of the characteristics is lacking, the shares cannot be said to be preferential-they would be termed to be ordinary shares.

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