Equity Vs. Preference Shares - Which Investment Is Better?

 The choice between equity shares and preference shares will depend on your risk tolerance, investment horizon and financial goals

When investing in stocks, two primary options are equity shares and preference shares. In addition to profit potential, investors also need to consider various other aspects such as dividend, voting rights, liquidity and rights over company's assets. To understand which one is most suitable for you, it is important to consider the following factors.

Dividend - Profits can be generated via dividend income and capital appreciation. In case of equity shares, the dividend is variable. It is usually paid when the company earns a profit and announces a dividend payout. In preference shares, you are eligible to receive fixed dividends. Dividend will be paid only when the company has profits to share with investors. But preference shareholders get priority over equity shareholders in dividend payment. Also, if it is cumulative preference shares, dividend for a loss-making year is accumulated and paid when profits are available.

Capital appreciation - Equity shares have an advantage here since stock price can increase based on market valuation. In comparison, most preference shares are not traded on stock exchanges. Even the ones that are listed do not see any major price fluctuations. If you are looking at capital appreciation, investment in equity shares will be a better option. However, you also need to consider the risks such as fall in prices of equity shares.

Liquidity - When investing their money, people also want to ensure adequate liquidity. Equity shares have an advantage here, as these can be sold easily on stock exchanges. In most cases, you can get the money in your bank account within one trading day after the sale. Preference shares (listed) may be difficult to sell, as not many buyers may be available. For unlisted preference shares, you only have the option for private transfer to other investors. This takes time. In redeemable preference shares, the company will buy back the shares after a specific period (e.g. 5 or 10 years).

Ownership / Voting rights - In equity shares you enjoy full ownership stake in the company. But it also means that you will have to share the losses, along with the profits. In preference shares, there is limited ownership. Equity shareholders can exercise their vote in important company decisions. In comparison, preference shareholders usually do not have voting rights.

Risk - Equity shares are generally considered riskier, as valuation depends on company performance and stock market fluctuations. Preference shares are relatively less risky, as one can access fixed dividends.

Rights over company assets (liquidation) - Preference shareholders will benefit in case the company declares bankruptcy and is put up for liquidation. When the assets of the company are sold/auctioned, preference shareholders will be given priority over equity shareholders in terms of accessing the funds generated through liquidation. However, the top priority will be given to the company's creditors.

As is evident from above factors, both equity shares and preference shares have their pros and cons. Choose equity shares if you prioritize profits and are ready to take risks. Preference shares will be better if you are looking at a fixed income source and have a long-term investment horizon.

source : newspatrolling