Basics of Stock Market - Beginner

Difference between Preference shares and Equity shares

All shareholders may have some idea or knowledge of what a share is. The definition can be found in the word itself. Are you aware that each shareholder is actually part-owner of the company?Every company has its own capital structure.

  • Share capital
  • Debt funds
  • Surplus and Reserves

There are many types of share:

  • Equity share capital
  • Preference share capital, etc.

Let's now understand and learn the basics of equity and preference shares.

Preference shares and equity shares

They are two sides to a coin. Each has its advantages and disadvantages. While dividends of preference shares are fixed, the performance of the company is a major determinant of their equity dividends.

Equity market is high-risk. Therefore, equity shareholders are the true bearers of the company as they have a residual part in liquidation. Preference shares have higher earnings claims and a fixed dividend rate.

Let's look at the difference between equity shares and preference shares. Preference shares
A company issues

  • Equity share capital Rs. 10 crore, 1 million shares of Rs. 10 per.
  • Preference share capital Rs. 1 crore, 10 000 shares of Rs. 10 lakh shares of Rs.

Preference shareholders will have preferred rights over equity shareholders.

There is a difference between preference share and equity share

Basis of DifferentiationEquity sharesPreference shares
DefinitionAlso called ordinary shares. As the company raises funds, equity share is its foundation. These cannot be converted into preference sharesThese are shares that promise a preference over equity shares. These shares can be converted into equity shares
  • Dividends are not a right of equity shares
  • This is the rate at which dividends fluctuate.
  • Preference shares, which are based on time, cumulative, or non-cumulative, can be entitled to the dividend
  • The rate of dividends is set here
Voting rightsVoting rights in general meetingsYou do not have voting rights
TypesThese shares are ordinary shares, and do not have any type of rights.There are many types of them, including:
  • Convertible and not-convertible
  • Non-cumulative and cumulative
  • Non participatory, etc.
LiquidationEven after the repayment of preference shares, shareholders will retain the right to the asset during liquidationAfter the repayment, the shareholders will be entitled to first rights
Participation rightsThey are responsible for the overall management of the company.Participation rights in the management of the company are not available to you

Investors need to be knowledgeable about all forms of investment because there are high risks. The investment golden rule is to buy shares or stocks when they are low and then sell them when they are high. Long-term investments offer a longer return. The ability to invest can lead to huge profits.

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