Difference Between Equity Share and Preference Share

When a massive company (like Reliance or Tata) needs to raise hundreds of crores to build a new factory, they divide their ownership into tiny pieces called 'Shares' and sell them to the public. There are two types of shares a company can issue: Equity and Preference. They offer completely different rights and risks to the investor.

Question (Click to Flip)

Why would anyone buy Equity shares if Preference shares are safer?

Answer

Because of greed and growth! A preference share will only ever pay you a flat 8%. But if a company like Apple grows globally, the value of an equity share multiplies by 100x, making the equity investor a millionaire.

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Key Facts

By law, a company is not legally required to issue Preference shares, but it MUST issue Equity shares to exist.

Equity shares are never refunded during the lifetime of the company. If you want your money back, you must sell your shares to another person on the stock exchange.

1. What are Preference Shares?

As the name suggests, these investors get 'preferential treatment' (VIP treatment) in two specific areas:

Dividend Rate: They receive a fixed, guaranteed percentage of dividend every year (e.g., 8% Preference Shares).
Payment Priority: They are always paid their dividends before any equity shareholder gets a single rupee.
Risk: Very low risk. If the company goes bankrupt and shuts down, preference shareholders are given their invested money back before the equity shareholders.
Voting Rights: They do not have normal voting rights. They cannot vote to choose the CEO or directors.

2. What are Equity Shares?

These are the true, permanent owners of the company. When you buy stocks on the stock market app, you are buying Equity shares.

Dividend Rate: It fluctuates. If the company makes a massive profit, equity holders get massive dividends. If the company makes a loss, they get zero.
Payment Priority: They are the last people in line. They only get dividends if there is money left over after paying the preference shareholders.
Risk: Very high risk. If the company shuts down, they are the last to get their money back (and often lose everything).
Voting Rights: They have full voting rights. They have the power to vote in meetings and control the future of the company.

3. Summary of Differences

Feature	Equity Shares	Preference Shares
Voting Rights	Yes, full voting rights.	No voting rights.
Dividend Rate	Fluctuating (High reward).	Fixed and guaranteed.
Risk Level	High risk (True owners).	Low risk (Safe investors).
Arrears (Missed payments)	Missed dividends are lost forever.	Missed dividends can accumulate and be paid next year (Cumulative).

Questions and Answers

Why would anyone buy Equity shares if Preference shares are safer?+

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