Difference Between Equity Shares and Preference Shares
The nature and classes of shares are essential topics for school and competitive exams, as well as for anyone interested in business or company law. Shares represent ownership in a company and determine the rights, obligations, and benefits of shareholders. Understanding their types helps in making sound investment and exam decisions.
| Class of Share | Main Features | Example |
|---|---|---|
| Equity Shares | Voting rights, variable dividends, highest risk | Common shares, ordinary shares |
| Preference Shares | Fixed/cumulative dividend, priority in payout, usually no voting rights | Cumulative, redeemable, convertible preference shares |
| Other Classes | Different voting or dividend rights, special control | Class A, Class B, founder’s, restricted shares |
Nature of Shares
In company law, shares are fractions of a company’s share capital, representing a unit of ownership. Shareholders receive rights such as dividend entitlement, voting, and a claim on the company's assets when it is wound up. Shares are considered movable property and can be transferred, subject to conditions in the company's Articles of Association.
- Shares are units of company capital.
- They provide ownership and limited liability.
- They can be transferred (bought/sold) under prescribed rules.
- Different classes of shares come with unique rights and features.
- Shareholder status offers rights to dividends, voting, and asset claims.
Classes of Shares
A company can issue several types of shares, each with specific rights and obligations. The two main classes under the Companies Act are Equity Shares and Preference Shares. Other special classes may exist depending on the company’s articles.
- Equity Shares (Ordinary Shares)
- Preference Shares
- Special Classes (e.g., Class A, Class B, Founders’ Shares, Restricted Shares)
Equity Shares
Equity shares are the main type of share in most companies. They represent real ownership and confer voting rights, allowing shareholders to influence major company decisions. Equity shareholders get variable dividends and have a residual claim on assets after all dues and preference shareholders are paid.
- Ownership rights and voting power
- No fixed dividend rate; depends on profits
- Right to participate in company management
- Residual claim on assets after liabilities and preference shares
- Highest risk, but potential for high returns
- Freely transferable
- Limited liability to unpaid amount on shares
Read more about Equity Shares on Vedantu for deeper understanding.
Preference Shares
Preference shares offer a fixed rate of dividend and priority over equity shares for both dividend and capital repayment. These shares usually do not provide voting rights (except for special matters). They suit investors seeking stable income with lower risk than equity shareholders.
| Type of Preference Share | Features |
|---|---|
| Cumulative | Unpaid dividends accumulate and are paid later |
| Non-Cumulative | No accumulation; unpaid dividends are lost |
| Redeemable | Can be bought back by the company after a period |
| Irredeemable | Cannot be bought back, except at liquidation |
| Convertible | Can be converted into equity shares |
| Non-Convertible | Cannot be converted into equity shares |
| Participating | Share in surplus after dividend distribution |
| Non-Participating | No share in surplus profit |
Learn more with Types of Shares and Issue of Shares on Vedantu for clear examples and exam notes.
Equity Shares vs Preference Shares: Comparison Table
| Point of Difference | Equity Shares | Preference Shares |
|---|---|---|
| Dividend | Variable, not fixed | Fixed, paid first |
| Voting Rights | Yes, on all matters | Usually none (except special cases) |
| Risk | Highest | Lower than equity |
| Priority on Assets | After preference shares | Before equity shares |
| Redemption | No fixed period | Can be redeemable or irredeemable |
For a full comparison, visit Difference Between Equity and Preference Shares.
Other Classes of Shares
Some companies issue additional classes for specific control or financial needs. These include Class A/B/C shares, founders’ shares, and restricted shares. Each class offers different voting or dividend rights, helping founders retain control or offering special terms to investors and employees.
- Class A Shares: Usually have more voting rights, often held by founders or management.
- Class B/C Shares: May have restricted voting/dividend rights, sometimes offered to the public.
- Founder’s Shares: Special shares for company founders, sometimes with enhanced control.
- Restricted Shares: Given to employees/executives with sale restrictions for a holding period.
Importance of Share Classes
The classification of shares is crucial for both companies and shareholders. It determines who manages the company and how profits are shared. For students, understanding share classes is essential for answering exam questions on company law, business structure, and investment strategy.
Explore company structure aspects in Features of Company and dive into capital types in Types of Share Capital.
Page Summary
To sum up, the nature and classes of shares define investor rights and company management. Equity shares confer ownership and voting rights, while preference shares offer stable, prioritized dividends. Knowing these distinctions is vital for exams and business decisions. For more commerce topics, Vedantu provides clear, student-friendly study resources.
FAQs on Nature and Classes of Shares Explained for Commerce Students
1. What is the nature of shares?
Shares represent the ownership in a company. They are a fundamental aspect of business finance and investments. Legally, shares represent a portion of the company's share capital and confer certain rights and responsibilities to their holders, also known as shareholders.
2. What are the different classes of shares?
The main classes of shares are equity shares and preference shares. Other classes, such as Class A, Class B, and Class C shares, founders' shares, and restricted shares, exist but are less common. The classification of shares impacts shareholder rights, dividend distribution, and company control.
3. What is the nature of shares in company law?
In company law, shares are considered movable property representing fractional ownership in a company. They are transferable, subject to the company's articles of association. Shareholders have rights depending on the class of shares they hold, such as voting rights and dividend entitlement. Understanding the legal nature of shares is crucial for comprehending corporate governance and financial transactions.
4. What are equity shares?
Equity shares represent the ownership stake in a company. They carry voting rights, meaning shareholders can participate in company decisions. Dividends on equity shares are not fixed, meaning they vary depending on company performance. Equity shareholders bear higher risk but also have the potential for greater returns. This is in contrast to preference shares.
5. What are preference shares?
Preference shares have priority over equity shares in receiving dividends. They offer a fixed dividend rate, which is generally a lower risk than equity shares. However, preference shareholders typically do not have voting rights unless specified otherwise. There are various types, including cumulative and convertible preference shares, each with its own features.
6. What is the difference between equity and preference shares?
The key difference lies in dividend payments and voting rights. Equity shares offer variable dividends and voting rights, whereas preference shares offer fixed dividends but usually lack voting rights. Equity shares represent ownership, while preference shares have a debt-like characteristic. The risk and return profiles also differ significantly.
7. What are Class A, Class B, and Class C shares?
Class A, B, and C shares represent different classes of shares within a company, each with its own set of rights and privileges. These classifications often relate to voting rights, dividend distribution, or liquidation preferences. The specific characteristics of each class are defined in the company's articles of association and other legal documents. This allows for sophisticated capital structures and various forms of investor participation.
8. What is the nature of stock?
The term "stock" is often used interchangeably with "shares." However, "stock" can also refer to the aggregate value of a company's shares or to shares traded on a stock exchange. While it generally reflects ownership, the specific legal implications depend on context, particularly in discussing legal ownership and rights associated with the company and its assets.
9. How do equity shares differ from preference shares?
Equity shares carry voting rights and offer variable dividends based on company profits, while preference shares generally have fixed dividends and limited or no voting rights. Equity shareholders bear higher risk but have the potential for greater returns. Preference shares are less risky but also usually offer lower potential returns.
10. What are the features of shares?
Shares have several key features: They represent fractional ownership in a company; they are generally transferable; they confer rights to dividends and, in some cases, voting rights; and their value fluctuates based on market conditions and company performance. These features determine the level of participation and risk involved for investors.
11. How does the class of shares influence shareholder control in a company?
The class of shares held significantly influences shareholder control. Equity shares typically carry voting rights, giving shareholders a voice in company decisions. Preference shares often lack voting rights, limiting their influence on corporate governance. Different classes can create different levels of shareholder power and influence.
