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PREFERENCE SHARE:
Preference shares, also known as preferred stock, is an exclusive share option which enables
shareholders to receive dividends announced by the company before the equity shareholders
...

It is considered as a hybrid security option as it represents the characteristics of both debt and
equity investments
...
They however do not
enjoy any kind of voting rights, unlike equity shareholders
...
Preference in dividends: Preferred stocks pay high dividends in comparison to
common stocks in this current low-interest-rate environment and companies can pay
dividends to equity shareholders only after paying preference shareholders
...
Advance access to assets of the company: If the company goes bankrupt and
insolvent, the preference shareholders are given first preference to get paid from the
liquidated money
...
No voting rights: Preference shareholders do not have any voting rights but
sometimes they are allowed the right to vote only in case of extraordinary events
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Preferred stocks can be convertible: Preference shareholders can take advantage of
converting their preference stocks into common shares and every company must be
supposed to offer convertible shares

Types of Preference Shares
The various types of preference share are discussed below:
1
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These dividends will be counted as arrears in
years when the company is not earning profit and will be paid on a cumulative basis,
the next year when the business generates profits
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Non-cumulative preference shares: These types of shares do not accumulate
dividends in the form of arrears
...

If there is a year in which the company doesn’t make any profit, then the shareholders
are not paid any dividends for that year and they cannot claim for dividends in any
future profit year
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Participating preference shares: These types of shares allow the shareholders to
demand a part in the surplus profit of the company at the event of liquidation of the

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6
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In other words,
these shareholders enjoy fixed dividends and also share a part of the surplus profit of
the company along with equity shareholders
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In this case, the shareholders receive only the fixed dividend
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These
types of shares help the company by providing a cushion during times of inflation
...
In other
words, these shares can only be redeemed at the time of winding up of the company
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Non-convertible Preference Shares: These type of preference shares cannot be
converted into equity shares
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EQUITY SHARE CAPITAL:
An equity share, normally known as ordinary share is a part ownership where each member is
a fractional owner and initiates the maximum entrepreneurial liability related to a trading
concern
...

Types of Equity Share
•

•
•
•

•

•
•

Authorized Share Capital- This amount is the highest amount an organization can
issue
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Issued Share Capital- This is the approved capital which an organization gives to the
investors
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Paid Up Capital- This is a section of the subscribed capital, that the investors give
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Right Share- These are those type of share that an organization issue to their existing
stockholders
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Bonus Share- When a business split the stock to its stockholders in the dividend
form, we call it a bonus share
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Advantages and disadvantages (Features):
Advantages of Equity Shares Capital

Dividend
An investor is entitled to receive a dividend from the company
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Capital Gain
The other source of return on investment apart from dividends is capital gains
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Limited liability
The liability of a shareholder or investor is limited to the extent of the investment made
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Rights Shares
Whenever companies require additional capital for expansion, they tend to issue ‘rights
shares
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Right Shares are
issued at a price lower than the current market price of the equity share
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Bonus Shares
At times, companies decide to issue bonus shares to their shareholders
...
Bonus shares are free shares given to existing shareholders, and they are often
given in place of dividends
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In official terms, he gets voting rights in the company
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He enjoys a share of the income of the company
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Disadvantages

Dividend
The dividend which a shareholder receives is neither fixed nor controllable by the investor
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If there is a
loss, there is no question of dividend
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High Risk
Equity share investment is a risky investment compared to any other investment like debts
etc
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There is no collateral
security attached to it
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It is always very difficult to book
profits from the market
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Limited Control
An equity investor is a small investor in the company, therefore, it is hardly possible to
impact the decision of the company using the voting rights
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Income that
is available to equity shareholders is after the payment of all other stakeholders’ viz
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DIFFERENCE BETWEEN EQUITY SHARES AND PREFERENCE SHARES:
Equity share and Preference share are the two types of share that a company issues
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Preference share experience the perquisites of the dividend
distribution first
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The company preference share receives the dividend at a fixed rate
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Parameters

Preference Share

Equity Share

Dividend Rate

Has a fixed rate

Fluctuates

Vote Rights

No voting rights

Have voting rights

Participation in
Management

Has no right to participate in
management decision

Has the right to participate in
management decision

Preferences

Get the first preference, before equity
share

Gets second preference, after
preference share

SWEAT EQUITY:
Sweat equity shares can only be issued by a company to its Directors or Employees, at a
discount or for a consideration other than cash, for their providing of know-how or creation
of intellectual property rights like trademark, patent, copyright or value additions
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Sweat equity shares are issued for value additions of the Director or Employee
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For sweat equity shares to be issued, the
employee’s renumeration for value addition should not have been paid or included in the
normal remuneration payable, under the contract of employment or monetary consideration
payable under any other contract
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Hence, the rights, limitations, restrictions and provisions which are applicable to
equity shares are applicable to sweat equity shares and the holders of sweat equity shares
rank pari passu with other equity shareholders
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The resolution must specify the number of shares, the current market price,
consideration and the class or classes of Directors and employees to whom such equity shares
are to be issued
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Such appreciation encourages them to remain with the
company for a longer period
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Therefore, rewarding employees with sweat equity
shares makes it reasonable
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Provide Compensation: They can be used to make up for any wage reductions that any
employees may have experienced
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DIFFERENCE BETWEEN EQUITY SHARE CAPITAL AND PREFERENCE SHARE
CAPITAL:
Equity Share Capital is the funds generated by a company through issuing Equity shares (also
known as ordinary shares)
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The Equity Shareholders become
stakeholders in the organisation, and these investors are eligible for both ownership and
voting rights in the company to select their management
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It is like a perpetual source of
funding for the organisation
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The Equity Shareholders do not get a fixed rate of dividend
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Equity shareholders get voting rights in the selection of the company’s management
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Preference Shareholders have the first right to
receive dividends even before equity shareholders
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They are entitled to a fixed
rate of compensation every time the company decides to declare a dividend
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Some of the features of Preference Shares are as follows:
•
•
•
•
•

Preference Shareholders have the first right to claim the company’s assets whenever
they decide to wind up their operations
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The Preference Shareholders get a fixed rate of dividend
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Preference Shares have features of both debt and equity investment
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Differences between Equity Share Capital and Preference Share Capital

The main differences between Equity Share Capital and Preference Share Capital are as
follows:
Preference Share Capital

Equity Share Capital
Definition

Preference Share Capital is the funds that a company has
generated by issuing preference shares
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Dividend Rate
The Dividend Rate in the case of Preference Share Capital
is not changeable
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Voting Rights
Preference Shareholders do not have any voting rights in the
selection of the management
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Participation in Management
Preference Shareholders do not have the right to participate
in the management decisions
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Claim to assets of the company
Preference Shareholders have a right to claim over the
company’s assets whenever they decide to wind up their
operations
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Preference in paying dividend
Preference shareholders get the first preference when the
company pays a dividend
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The different types of Preference Shares are as follows:
•
•
•
•
•
•
•
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Cumulative Preference Shares
Participating Preference Shares
Redeemable Preference Shares
Convertible Preference Shares
Non-Cumulative Preference Shares
Non-Participating Preference Shares
Non-Redeemable Preference Shares
Non-Convertible Preference Shares

The different types of Equity Shares are
as follows:
•
•
•
•
•
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Authorised Share Capital
Issued Share Capital
Subscribed Share Capital
Paid-up Share Capital
Rights Share
Bonus Share
Sweat Equity Share

Arrears of Dividend
Preference Shareholders are eligible to get arrears of unpaid
dividends from previous years
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Equity Shareholders are not eligible to
get arrears of unpaid dividends from
previous years
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Equity Shares can never be eligible to get
converted into Preference Shares
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Equity Shareholders are at a higher risk
compared to Preference Shareholders

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