Question

Distinguish between the following.

Equity shares and Preference shares.

Answer 1

Basis	Equity Shares	Preference Shares
1. Meaning	Shares that are not preference shares are called equity shares i.e. these shares do not have the preferential right for payment of dividend and repayment of capital.	Preferences shares are shares that carry preferential rights as to payment of: Dividend and Repayment of capital.
2. Rate of dividend	Equity shareholders are given dividends at fluctuating rates depending upon the profits of the company.	Preference shareholders get dividends at a fixed rate.
3. Voting right	Equity shareholders enjoy normal voting rights. They participate in the management of their company.	Preference shareholders do not enjoy normal voting rights. They can vote only on matters affecting their interests.
4. Nature of Capital	Equity share capital is permanent capital. It is known as ‘Risk capital’.	Preference share capital is ‘safe capital’ with a stable return.
5. Nature of investor	Investors who are ready to take the risk to invest in equity shares.	To get an immediate return, an investor invests in working capital. The investor receives comparatively less return.
6. Face value	The face value of equity shares is generally Rs. 1/- or Rs. 10/- It is relatively low	The face value of preference shares is relatively higher, i.e. Rs.100/- and so on
7. Types	Equity shares are classified into equity shares with normal voting rights equity shares with differential voting rights	Preference shares are classified as Cumulative preference shares Non-cumulative preference shares Convertible preference shares. Non-convertible preference shares Redeemable preference shares. Irredeemable preference shares. Participating preference shares Non-participating preference shares
8. Capital appreciation	The market value of equity shares increases as a company’s prosperity grows. It leads to an increase in the Value of shares.	The market value of preference shares does not fluctuate. So there is no possibility of capital appreciation.
9. Risk	Equity shares are subject to higher risk. That is because of the fluctuating rate of dividends and no guarantee of a refund of capital.	Preference shares are subject to less risk. It is because of the fix rate of dividends and preferential rights regarding dividends and repayment of capital.