Namaskar! My name is Dilip, and welcome to Market Under. In this article, we will explore the key differences between preference share and equity share.
Many of you have asked questions such as:
- Why are preference shares called preference shares?
- What kind of priority is given to them?
- What are the returns and risks associated with both types of shares?
- Which type of investors prefer preference share and equity share?
- Why do companies raise capital through equity or preference shares?
We will answer all these questions in this detailed guide.
Companies raise funds in two main ways:
- Debt Financing – Borrowing money through loans or issuing bonds.
- Equity Financing – Raising capital by issuing shares.
Now, let’s assume a company cannot take a loan or does not want to take on debt. It decides to raise money through equity financing.
Let’s say this company is worth ₹10 crores and decides to issue shares. The ownership is divided as follows:
- 50% (₹5 crores) retained by promoters.
- 35% (₹3.5 crores) raised through common shareholders.
- 15% (₹1.5 crores) issued as preference shares.
This results in two categories of investors:
- Equity Shareholders – Regular shareholders who own a stake in the company.
- Preference Shareholders – Investors who have priority in dividend payments and liquidation.
Now, let’s examine the key differences between preference share and equity share.
1. Dividend Rights
- Receive fixed dividends similar to bond interest payments.
- For example, if a company promises 14% dividend, preference shareholders receive it regardless of profits.
- Do not receive guaranteed dividends.
- Dividend payments depend on the company’s profitability and board decisions.
- Their main profit comes from share price appreciation.
2. Priority in Dividend Payment
Preference shares get priority in dividend payments. When a company earns Profit After Tax (PAT), the order of payments is:
- Preference shareholders receive their dividends first.
- Equity shareholders get dividends only if there is remaining profit.
This guaranteed first payout is why they are called preference shares.
3. Rights During Company Liquidation
In case of bankruptcy or liquidation, the order of payments is:
- Debt Holders (Loans & Bonds) – Paid first.
- Preference Shareholders – Paid after debt holders.
- Equity Shareholders – Paid last (if anything remains).
In most cases, equity shareholders lose their entire investment in bankruptcy.
4. Trading in the Stock Market
- Equity shares are publicly traded on stock exchanges.
- Preference shares are not actively traded like equity shares.
However, some preference shares may have convertibility options that allow conversion into equity shares.
5. Risk and Return
| Feature | Preference Shares | Equity Shares |
| Returns | Fixed dividends | Based on stock price movement |
| Risk Level | Lower risk | Higher risk |
| Market Fluctuations | Not affected | Highly affected |
| Profit Potential | Limited | High (if stock price increases) |
Thus, preference shares offer stability while equity shares offer growth potential with higher risk.
6. Voting Rights & Control
| Feature | Preference Shareholders | Equity Shareholders |
| Voting Rights | No voting rights | Full voting rights |
| Management Control | Cannot influence decisions | Can vote on board decisions |
Equity shareholders have control over management decisions, whereas preference shareholders do not participate in voting.
7. Type of Investors
| Feature | Preference Shares | Equity Shares |
| Who Invests? | Institutions, wealthy individuals | Retail & institutional investors |
| Availability for Public? | Limited | Publicly available |
Retail investors mostly buy equity shares, whereas preference shares are preferred by wealthy individuals, financial institutions, and private equity firms.
8. Exit Options
| Feature | Preference Shares | Equity Shares |
| Sell on Stock Market? | No (except convertible ones) | Yes |
| Company Buyback? | Possible | Possible |
| Conversion to Equity? | Some preference shares are convertible | Not applicable |
Equity shareholders can easily exit by selling shares in the stock market, while preference shareholders may need to wait for a company buyback or convert to equity.
- Avoids high debt, reducing solvency risk.
- No obligation to pay fixed returns (unlike loans).
- Protects the company in financial downturns.
- Helps raise capital without increasing debt.
- Gives investors some fixed returns, making them more attractive.
- Some preference shares can be converted into equity later.
- Allows companies to buy back shares and retain ownership.
Thus, preference shares serve as a middle ground between debt and equity financing.
Final Thoughts
We have explored the key differences between preference share and equity share, including dividend rights, risks, returns, voting power, and why companies issue them.
Key Takeaways:
✅ Preference shares provide fixed returns but no control.
✅ Equity shares offer growth potential but higher risk.
✅ Equity shareholders participate in decision-making, while preference shareholders do not.
✅ Companies use both to balance risk and capital needs.
I hope this article helped clarify differences between Preference Share And Equity Share!
Till then, keep learning, keep earning, and stay happy!
1. What is the difference between preference share and equity share?
Preference shares offer fixed dividends and priority in payment during company liquidation, but they don’t provide voting rights. Equity shares, on the other hand, represent ownership in a company with fluctuating dividends based on the company’s profit and offer voting rights to shareholders.
2. Why are preference shares called ‘preference’ shares?
Preference shares are called ‘preference’ shares because they give shareholders priority over equity shareholders in receiving dividends and claims on company assets during liquidation.
3. Can preference shares be traded on the stock market?
Unlike equity shares, preference shares are generally not traded on the stock market. However, some preference shares may have convertibility options that allow them to be converted into equity shares, which can then be traded.
4. Are dividends on preference shares guaranteed?
Yes, dividends on preference shares are generally fixed and promised by the company. The company must pay these dividends before equity shareholders receive any.
5. What are the risks associated with preference share and equity share?
Preference shares carry lower risk since they offer fixed returns and priority in dividend payment. However, in case of bankruptcy, preference shareholders may still lose their investment. Equity shares are riskier because returns depend on company performance and market conditions, and shareholders are last in line during liquidation.
6. Who invests in preference shares?
Typically, financial institutions, wealthy individuals, and private equity firms invest in preference shares. Retail investors generally prefer equity shares due to their accessibility in the stock market.
7. Why do companies issue preference shares?
Companies issue preference shares to raise capital without increasing debt and to offer fixed returns to investors. It helps companies maintain a balance between equity and debt financing while retaining some control over their ownership structure.
8. Do equity shareholders have voting rights?
Yes, equity shareholders have voting rights and can participate in important decisions like electing the board of directors, while preference shareholders generally do not have voting rights.
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