Equity or Preference Shares: Which One Fits Your Investment Goals

If you want to become a part-owner of a company, you need to invest in its equity or preference shares. One of the biggest dilemmas of all time faced by investors is choosing between these shares. Equity shares represent actual ownership in a company and the chance for higher returns. However, these shares are considered riskier because of no dividends guarantee. Also, equity shareholders are last to be paid if the company is liquidated. 

On the other hand, preference shares provide fixed dividends and are less risky. In case of liquidation of a company, the preference shareholders are paid before equity shareholders. However, one major drawback of having preference shares is that they usually do not offer voting rights or high growth potential. 

As you can clearly tell, both the types of shares have their advantages and drawbacks. So, how can you decide which shares fit your investment goals? In this blog post, we shall explain equity and preference shares and highlight their differences, so you can decide which shares are ideal for you!

What are Equity Shares?

Equity shares, also known as ordinary shares and common stocks, are shares that represent ownership in a company. A company issues such shares so as to raise capital and expand its business operations. When an investor purchases equity shares units, they get the partial ownership of the company and become its part owner. 

The equity shares are non-redeemable in nature and act as a long-term financing source for the companies. Investing in equity shares can offer benefits like dividends and capital appreciation. However, these shares’ dividends are not a fixed figure and tend to fluctuate. 

Equity shareholders have the right to vote on important company decisions, and their voting power usually depends on how many shares they own. The equity shares of publicly listed companies can be easily bought and sold in the stock market via exchanges like National Stock Exchange and Bombay Stock Exchange.

What are Preference Shares?

Preference shares, also known as preference stocks, are shares that offer fixed dividends to the shareholders. The shareholders with these shares are provided dividends prior to the equity shareholders. In case a company undergoes liquidation, the preference shareholders are paid before equity shareholders. 

However, the preference shareholders usually do not have normal voting rights in company management. As a result, they have limited influence over key decisions of the company. 

Preference stocks are issued by companies to raise capital. Depending on the terms set at the time of issue, certain preference stocks may be converted into equity shares or redeemed after a certain period.

Difference between Equity and Preference Shares

In the table below, we have explained how equity and preference shares differ from each other :-

Preference vs Equity: Pros and Cons

Let’s take a look at the pros and cons linked with preference share and equity share :-

Equity

The following are the pros and cons linked with equity share:-

Pros:- 

• There is a potential for capital appreciation. As the company performance rises, the stock value goes up. 

• Additionally, shareholders with equity stocks may receive free additional/bonus shares or get the right to buy new stocks at discounted rates. 

• They can vote on key company decisions as they have voting rights.

• Equity shares listed on stock exchanges are easy to buy and sell. 

Cons:-

• Equity stockholders are last to get paid in case of liquidation of the company.

• Dividends are not fixed or guaranteed. They totally depend on the board decisions as well as profitability of the company.

• As the equity stocks fluctuate frequently, there is a high possibility for capital loss.

Preference

The following are the pros and cons linked with preference share:-

Pros:-

• The dividends received are fixed. 

• Those with preference stocks receive dividends before those with equity stocks.

• They receive capital before the equity stockholders in case of winding up of a company.

• Certain preference stocks can be converted into equity stocks.

Cons:- 

• The preference stockholders have no voting rights. So, they do not have control over key decisions of the company.

• Their returns remain fixed. They do not increase even when the company earns exceptionally high profits.

• In most cases, they also do not gain much from capital appreciation over time.

Conclusion

At the end of the day, it’s you who needs to decide which option between equity and preference shares fits your investment goals. To reach this decision, you must carefully consider your risk appetite, financial objectives and how long you plan to keep your investment. If you do not mind market volatility, higher returns/risks potential and do not require fixed dividends, you may go for equity shares. In case you prefer steady income with fixed dividends and do not mind having limited voting rights in company’s key decisions, preference shares may be a better choice for you. 

Remember that investment decisions should be made carefully as your money is hard earned. If you are still unsure which shares are better as per your investment goals, you can consult a certified investment advisor for proper guidance in this regard. 

Also Read:- Different Types of Shares In a Private Limited Company

Author: CA Sachin Chawla

Hi, I'm Sachin Chawla. I’m a commerce graduate from Agra University and a Chartered Accountant (2015) with DISA certification. I focus on helping businesses with formation, management, tax and FEMA matters, business licenses and regulatory compliance, IP advisory, risk management and auditing among others. Through my articles, I aim to share my expertise and provide practical guidance in these areas.