If you have ever asked what are equity shares and what are preference shares, you are already on the right track. Both are ways to own a part of a company, yet they behave very differently in practice.
This blog explains the difference between equity and preference shares, the core features of each class, the common types of equity shares and types of preference shares, and how investors in India can decide which suits their goals.
Equity shares represent ownership. When a company issues equity to raise capital, buyers become part-owners in proportion to what they hold. Equity holders typically have voting rights on key matters, and their returns depend on how the business performs, how markets value that performance, and whether dividends are declared. In spirit, equity is open-ended participation in a company’s journey.
WHY SMC
- 20 Lac+ unique clients
- 33+ Years of Serving
- Advance Technical Analysis
- Free Demat Account
Preference shares are also ownership, with a twist. They carry priority over equity on dividends and on the distribution of assets if the company is wound up, subject to terms in the class. Voting is usually limited. Many issues specify whether dividends may accumulate if unpaid, whether the shares can be redeemed, and whether they can be converted into equity later. Think of preference as sitting between straightforward debt and fully participative equity.
- Cash flows: Equity depends on performance and policy. Preference follows stated terms that set the order of payout.
- Control: Equity usually votes on ordinary matters. Preference generally does not, except where terms or law allow.
- Seniority: Preference ranks ahead of equity for dividends and, during winding-up, for asset distribution after creditors.
- Flexibility: Equity is permanent capital by design. Preference may be redeemable or convertible, depending on the class.
1. Purpose
- Equity: The core ownership base of the company, used to raise long-term capital.
- Preference: A way to raise capital while shaping dividend priority, redemption, or conversion features.
2. Dividends
- Equity: Variable and not guaranteed.
- Preference: Set by class terms and considered before equity dividends, subject to conditions.
3. Dividend Arrears
- Equity: No arrears concept.
- Preference: Certain types of preference shares allow unpaid dividends to be carried forward.
4. Voting And Influence
- Equity: Voting rights on ordinary matters are typical.
- Preference: Voting is usually restricted, with limited situations where it may apply.
5. Repayment Priority
- Equity: Last in the queue during winding-up, after creditors and preference holders.
- Preference: Ahead of equity, after creditor claims.
6. Redemption And Convertibility
- Equity: Not redeemable, and not built for conversion.
- Preference: May be redeemable, may be convertible into equity, as stated in the class.
7. Liquidity
- Equity: Generally more liquid, with active trading in the secondary market.
- Preference: Trading can be thinner, and exit often depends on listing and issue structure.
8. Suitability
- Equity: Suits investors who accept price swings for long-term growth potential.
- Preference: Suits investors who value defined dividend terms and seniority over equity holders.
Understanding types of equity shares helps you read company announcements with confidence.
- Ordinary or equity shares: The standard voting class that forms the ownership base.
- Bonus shares: Additional shares issued to existing holders by capitalising reserves, as per policy.
- Rights shares: Offered to existing shareholders, often to help maintain proportionate ownership.
- Sweat equity: Issued for contributions such as know-how or value addition.
- Employee stock options (ESOPs): Options that may convert into equity under plan rules.
WHY SMC
- 20 Lac+ unique clients
- 33+ Years of Serving
- Advance Technical Analysis
- Free Demat Account
Labels in preference classes signal how dividends work, whether unpaid amounts carry forward, and whether redemption or conversion exists.
- Cumulative preference: Unpaid dividends may accumulate as arrears, as per the terms.
- Non-cumulative preference: Unpaid dividends do not carry forward.
- Redeemable preference: Redeemed after a stated period or trigger.
- Irredeemable preference: Not structured for redemption in the ordinary course.
- Participating preference: May participate in surplus beyond fixed terms, if conditions allow.
- Non-participating preference: Limited to the stated terms.
- Convertible preference: May convert into equity under a stated ratio and timetable.
- Non-convertible preference: Remains as a preference without conversion.
- Callable or adjustable classes: May include call features or adjustable terms set out in the offer.
| Basis | Equity Shares | Preference Shares |
|---|---|---|
| Definition | Ownership forming permanent capital | Ownership with priority on payouts and assets |
| Dividends | Variable and policy-driven | According to the stated class terms |
| Dividend Priority | After preference | Considered before equity, subject to terms |
| Arrears | Not applicable | Possible for cumulative classes |
| Voting | Usually, with voting rights | Generally limited or not available |
| Liquidation Order | Paid last | Ahead of equity, after creditors |
| Redemption | Not redeemable | May be redeemable as per terms |
| Convertibility | Not designed for conversion | May be convertible into equity |
| Liquidity | Typically higher | Can be thinner depending on the listing |
| Suitability | Higher risk tolerance | Greater priority on payouts than equity |
How Investors Use Each in Practice
- Portfolio design: Long-term investors often anchor portfolios with equity for growth potential and may prefer more defined dividend rules.
- Capital raising by companies: When the objective is to shape payout priority without widening voting control to the same extent as equity, a preference class is a standard route.
- Income focus: Preference can fit income-oriented strategies where the terms describe how dividends are considered. Equity mixes uncertain dividends with market-driven price movement.
- Corporate events: During actions such as dividend consideration or winding-up, knowing where your class sits in the order of priority avoids confusion and helps plan exits better.
Reading Offer Documents Sensibly
Before acting on equity shares and preference shares, read the fine print.
- Dividend language: Look for cumulative or non-cumulative wording, and for conditions that govern payout.
- Redemption and call features: Note timelines, triggers, and adjustments.
- Conversion terms: Understand the conversion ratio, time windows, and any effect on your voting position.
- Ranking and security: Check where the instrument sits in the capital structure.
- Listing and liquidity: Review whether the issue is proposed to be listed, and what that implies for exits.
- Risk factors: This section often explains scenarios that directly affect dividends and capital.
WHY SMC
- 20 Lac+ unique clients
- 33+ Years of Serving
- Advance Technical Analysis
- Free Demat Account
Choosing Between Equity and Preference: A Simple Decision Path
- Your objective: Are you chasing growth, income, or a balanced mix?
- Your comfort with price swings: Equity prices can move around more than you prefer.
- Your need for defined rules: Preference may set out dividend treatment, redemption, and conversion.
- Your exit plan: Consider liquidity and holding period before you enter.
- Sizing: Keep any single instrument at a sensible weight in your portfolio.
Conclusion
Equity and preference are both ownership, but they serve different goals. Equity is about participation, voting, and market-linked outcomes. Preference is about priority on payouts and assets, with rules set out in the class. When you compare the two, focus on dividend treatment, voting, seniority, redemption, conversion, liquidity, and your own tolerance for risk.
Match the instrument to your objective and your exit plan, and read the offer document line by line before you decide. This approach keeps decisions steady, sensible, and aligned with how real portfolios are built.
Frequently Asked Questions – FAQs
They are units of ownership. Holders usually have voting rights, and their returns depend on the company’s performance, market sentiment, and dividend policy.
They are ownership instruments that stand ahead of equity for dividends and for asset distribution during winding-up, subject to class terms. Voting is generally limited.
3. Which suits a first-time investor, equity or preference?
It depends on goals. If you want open-ended growth with voting rights, equity may fit. If you prefer defined dividend rules and priority over equity on payouts, a preference may fit, subject to terms and personal suitability.
4. Are preference dividends always fixed and guaranteed?
Terms describe how dividends are considered, not a promise. Read the class document carefully and avoid assuming a certainty that the terms do not provide.
Certain classes are convertible according to a ratio and timetable stated in the terms. If conversion matters to you, review those clauses with care.
Author: All Content is verified by SMC Global Securities.
WHY SMC
- 20 Lac+ unique clients
- 33+ Years of Serving
- Advance Technical Analysis
- Free Demat Account
