<<–2/”>a href=”https://exam.pscnotes.com/5653-2/”>p>Equity and preference Shares, covering their differences, pros, cons, similarities, and frequently asked questions:
Introduction
Companies raise capital through issuing shares, which represent ownership in the company. There are two primary types of shares:
- Equity Shares: Also known as ordinary shares, these represent the fundamental ownership stake in a company.
- Preference Shares: These shares come with certain preferential rights, typically regarding dividend payments and the return of capital if the company is liquidated.
Key Differences: Equity Shares vs. Preference Shares
| Feature | Equity Shares | Preference Shares |
|---|---|---|
| Ownership | Represent ownership in the company, making the shareholder a part owner. | Represent a share of ownership, but with limited or no voting rights compared to equity shares. |
| Dividends | Entitled to dividends declared by the company, but the amount and frequency are not fixed. | Entitled to a fixed dividend rate, paid before equity shareholders receive any dividends. |
| Voting Rights | Carry voting rights, allowing shareholders to participate in company decisions. | Usually have no voting rights or limited voting rights, triggered under specific circumstances. |
| Liquidation Preference | In case of liquidation, equity shareholders are the last to be repaid after creditors and preference shareholders. | Have a higher claim on the company’s assets in case of liquidation compared to equity shareholders. |
| Risk | Generally considered riskier as returns depend on the company’s performance. | Considered less risky due to fixed dividend payments and liquidation preference. |
| Market Price | More volatile and influenced by market forces and company performance. | Relatively stable compared to equity shares. |
Advantages and Disadvantages
Equity Shares
- Advantages:
- Potential for higher returns through capital appreciation and dividends.
- Voting rights give influence over company decisions.
- Can benefit from company Growth and share buybacks.
- Disadvantages:
- Higher risk due to fluctuating share prices and uncertain dividend payments.
- Last in line for repayment in case of liquidation.
Preference Shares
- Advantages:
- Fixed dividend income, offering a more predictable return.
- Lower risk compared to equity shares due to dividend preference and liquidation priority.
- Disadvantages:
- Limited or no voting rights.
- Limited potential for capital appreciation compared to equity shares.
Similarities between Equity Shares and Preference Shares
- Both represent ownership (although to varying degrees) in a company.
- Both can be traded on Stock Exchanges (depending on the terms of issuance).
- Both entitle the holder to a share of profits, either through dividends or capital gains.
FAQs on Equity and Preference Shares
- What is the difference between cumulative and non-cumulative preference shares? Cumulative preference shares accumulate unpaid dividends, while non-cumulative preference shares do not.
- Can preference shares be converted into equity shares? Some preference shares have a conversion feature, allowing holders to convert them into ordinary shares under specified conditions.
- Are preference shares a good Investment? Preference shares can be a good investment for income-seeking investors who prefer lower risk, but they may not offer the same potential for high returns as equity shares.
- How are dividends on equity shares determined? Dividends on equity shares are determined by the company’s board of directors and depend on profits, cash flow, and growth plans.
- Can equity shareholders lose their entire investment? Yes, if the company performs poorly or goes bankrupt, equity shareholders may lose their entire investment.
Let me know if you’d like more details on any specific aspect of equity or preference shares!