Difference between Equity and Preference Stock

Difference Between Equity Stock and Preference Stock

Differences in Equity and Preference Stocks | One of the most significant differences between equity and preference shares is that dividends on preference shares are cumulative, whereas dividends on equity shares are not, even though they are not paid for several years.

Equity shares have voting rights and the dividend rate varies from year to year depending on the amount of profit available to the company. Preference Shares, on the other hand, are shares that do not have voting rights in the company and have a fixed amount of dividends.

Also read: Differences in Blue Chip and White Chip Stocks

When deciding on the capital structure, one should consider the combination of the two types of shares in the company’s share capital. And in order to do so, one must first have a general understanding of the two, therefore read this article to learn the difference.

  • What are Equity Stocks?
  • What are Preference Stocks?
  • Difference Between Equity Stock and Preference Stock

What are Equity Stocks?

The common stock of a company is known as equity stock. The real owners of the company are the equity shareholders, i.e. the number of shares they own according to their percentage of ownership in the company.

Equity shareholders have certain rights, such as voting rights at general meetings and the ability to appoint or remove company directors and auditors. In addition, they are entitled to the company’s profits, namely the higher the profit, the higher the dividend, and vice versa.

As a result, the amount of dividends is not fixed. This does not mean that they will receive all the profits, but rather the profits that remain after all costs and liabilities have been paid.

What are Preference Stocks?

Preference shares, as the name implies, take precedence over equity shares in such matters as the distribution of dividends at a fixed rate and the return on capital in the event of a loss to the company.

Preferred shareholders are part owners of the company in the same way as equity shareholders, but they do not have voting rights. However, they have the ability to vote on topics that directly affect their rights, such as resolutions to close companies or capital cuts.

The following are the types of preferred stock:

  • Participating Preference Stock
  • Non-Participating Preferred Stock
  • Convertible Preference Stock
  • Non-Convertible Preferred Stock
  • Cumulative Preferred Stock
  • Non Cumulative Preferred Stock

Difference Between Equity Stock and Preference Stock

  1. Equity shares cannot be converted into preferred stock. However, Preference shares can be converted into equity shares.
  2. Equity shares are not redeemable, but preferred shares are redeemable.
  3. The next major difference is the ‘right to vote’. In general, equity shares have voting rights, while preferred shares do not have voting rights.
  4. If in a financial year, dividends on equity share participation are not declared and paid, the dividends for that year will expire. On the other hand, in the same situation, the accumulated preferred stock dividend is paid in the following financial year except in the case of non-cumulative preferred stock.
  5. The dividend rate is consistent for preferred stock, while the equity dividend rate depends on the amount of profit earned by the company in the financial year. So it keeps changing.

Those are some of the differences between equity shares and preference shares. Hopefully this article is useful for those of you who need it. Thank you for visiting and don’t forget to share it with your friends too.

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