Difference Between Equity Shares and Preference Shares

Difference Between Equity Shares and Preference Shares

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By Yash Kumar Singh

In the world of finance and investment, there are various ways individuals can become stakeholders in a company. Two common ways are through equity shares and preference shares. These two types of shares serve distinct purposes and offer different benefits to investors. Let’s delve into the differences between equity shares and preference shares to gain a better understanding of their characteristics, advantages, and drawbacks.

Introduction & Difference Between Equity Shares and Preference Shares

Equity shares and preference shares are both mechanisms through which individuals can invest in a company. Each type of share comes with its own set of characteristics that cater to different investor preferences and financial strategies.

Ownership and Voting Rights

Equity shares, often referred to as common shares, represent ownership in a company. They grant shareholders voting rights and the ability to participate in key decisions during shareholder meetings. Preference shares, on the other hand, usually do not carry voting rights. They provide a fixed dividend but don’t offer the same level of influence over company affairs as equity shares do.

Dividend Priority

Preference shareholders have an advantage when it comes to receiving dividends. They typically receive dividends before equity shareholders. This means that if a company faces financial difficulties, preference shareholders are more likely to receive their dividends compared to equity shareholders.

Risk and Return

Equity shareholders take on more risk compared to preference shareholders. In the event of company liquidation, preference shareholders have a higher claim on company assets. However, equity shareholders have the potential to earn higher returns through capital appreciation, as their earnings are tied to the company’s performance in the stock market.

Convertible Nature

Preference shares sometimes come with the option to be converted into equity shares after a predetermined period. This conversion option allows investors to benefit from potential increases in the company’s stock price while initially enjoying the stability of fixed dividends.


Preference shares often have a fixed maturity date at which the company is obligated to redeem them at face value. Equity shares do not have a redemption feature, and their value is subject to market fluctuations.

Liquidation Preference

In the case of company liquidation, preference shareholders have a higher claim on company assets compared to equity shareholders. This offers a level of protection to preference shareholders, making them more attractive to risk-averse investors.

Participation in Company Growth

Equity shareholders have the opportunity to benefit from the company’s growth in terms of capital appreciation. As the company’s value increases, the value of equity shares also rises. Preference shareholders, however, do not directly benefit from the company’s growth beyond the fixed dividends.

Market Perception

Equity shares are often perceived as riskier but with the potential for higher rewards, making them suitable for investors seeking growth opportunities. Preference shares are viewed as more stable and are favored by investors who prioritize regular income over capital appreciation.

Tax Implications

Dividends received from equity shares are generally taxed differently than those from preference shares. Tax rates and regulations can vary based on the investor’s location and the type of shares they hold.

Investor Profiles

Equity shares attract investors who are comfortable with higher risk and are seeking capital appreciation. Preference shares are favored by risk-averse investors who prioritize a stable income stream.

Company Perspective

Companies issue different types of shares based on their funding needs and investor demand. Preference shares can help companies raise capital without diluting voting rights, while equity shares provide companies with a broader shareholder base.

Decision-making Influence

Equity shareholders have a say in company decisions due to their voting rights. Preference shareholders typically do not have voting rights, allowing them to avoid involvement in company decisions.

Capital Structure Impact

Preference shares are considered part of the company’s debt-equity mix and may affect its overall capital structure. Equity shares contribute to the company’s equity capital.


In conclusion, both equity shares and preference shares serve distinct purposes in the world of investment. Equity shares offer ownership, higher risk, and the potential for greater returns, while preference shares provide stability, priority in dividends, and protection in case of liquidation. The choice between these two types of shares depends on an investor’s risk tolerance, financial goals, and market outlook.


Are equity shares riskier than preference shares?

Equity shares carry more risk due to their variable returns and voting rights.

Can preference shares be converted into equity shares?

Yes, some preference shares come with a conversion option after a specified period.

Do preference shareholders have voting rights?

Generally, preference shareholders do not have voting rights.

What is the advantage of owning equity shares?

Equity shares offer the potential for higher capital appreciation and influence over company decisions.

Why do companies issue preference shares?

Companies issue preference shares to raise capital without diluting voting rights and to attract income-focused investors.

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