Though both equity share and preference share represents share capital for a company but both are different on various grounds, here are some of the differences between the two –
Equity Share and Preference Share Differences
Dividend and Refund of Capital
As far as dividend and refund of capital in case of winding up or insolvency of the company is concerned it is the preference shareholders who get paid before the equity shareholders.
Rate of Dividend
In case of preference shares rate of dividend is fixed while equity shareholders get dividend on the basis of performance of company, sometimes when company make loss then they are not paid any dividend. Hence for example if dividend on preference share is fixed at $2000 while for equity share dividend is fixed at 20 percent of profits than if the company has made profit of $20000 than equity shares will get $4000 which would be higher than preference shares.
While preference shares can be converted into equity shares after some years, if the terms of issue provide so while equity share cannot be converted in to preference share. Hence one can say that when it comes to conversion preference share are more flexible than equity shares.
Equity shareholders have voting rights and also they have right to participate in the management of the company which is not the case as far as preference shareholders are concerned.
Preference shares can be redeemed, while equity share cannot be redeemed, though company can buy back equity shares from the shareholders anytime it wants.
Thus from the above one can see that there are many differences between equity and preference share capital and any investor who is thinking whether to buy equity shares or preference shares of a particular company must look at the above differences and take his or her decision accordingly.