Difference Between Equity and Preference Shares: Complete Guide 2025 | LiteFinance

2025.09.24 2025.09.24
Difference Between Equity and Preference Shares: Comprehensive Investment Guide

Oleg Tkachenkohttps://www.litefinance.org/blog/authors/oleg-tkachenko/

What is the difference between preference shares and equity shares? Preference shares provide fixed dividend payments. Shareholders may still receive these dividends even if previous payments were skipped. Equity or common stocks, by contrast, usually offer greater liquidity and stronger growth potential. Preference shareholders enjoy priority in certain matters, while equity shareholders hold voting rights at general meetings.

Each type of share has its own advantages and disadvantages, which are discussed in this overview. Read the article and learn how preferred shares differ from equity shares.

Major Takeaways

• Equity shares are securities issued by a joint-stock company that represent an investor’s ownership in the total share capital. In simple terms, equity represents ownership rights and gives existing shareholders voting power in the company. A company’s market capitalization is calculated as the number of equity shares multiplied by their current market value.
• Preference shares also represent ownership in the joint-stock company, but they are not included in the market capitalization calculation. Instead, they carry certain privileges over equity shares.
• Preferred shareholders have priority when dividends are paid. This means they can receive payments that were missed in earlier periods before equity shareholders are paid.
• The dividend rate on preference shares is usually fixed as a percentage of their nominal or face value. These fixed or cumulative dividends are paid first, while equity shareholders may receive additional dividends depending on the company’s growth and retained earnings.
• In the event of liquidation, preference shareholders have priority rights to receive payments before equity shareholders, protecting the par value and intrinsic value of such shares, while common stockholders take higher risk.
• Preference shares are suitable for conservative investors who value relatively low volatility and consistent dividend payments with a predictable amount of income.

Equity Shares vs. Preference Shares: Complete Comparison

A share is a security confirming ownership of a stake in a joint-stock company. It entitles the holder to receive a portion of the profits as dividends. Shares are broadly classified into equity shares and preference shares. The key differences between them relate to how dividends are calculated and distributed, voting rights at shareholder meetings, and the rights to capital in the event of liquidation. These distinctions influence the value, volatility, and liquidity of each type of share.

Voting Rights and Corporate Control

Unlike equity shareholders, preference shareholders do not take part in corporate governance and are not allowed to vote, which limits their shareholder rights and company ownership influence. They are not involved in key decisions such as profit distribution, business strategy, or changes in management.

Note: These differences apply to most equity and preference shares, but each company is unique. The rights of shareholders are defined by the company's charter. In some cases, preference shareholders may be granted voting rights if specified in the charter.

This excerpt comes from the charter of a company regulated by the US SEC. As stated in the charter, if dividends remain unpaid for six quarters, preference shareholders gain the right to elect two directors at the shareholders’ meeting.

Dividend Payment Priorities

Preference shareholders receive dividends before equity shareholders, but only if dividends are declared by the board of directors. This reflects their preferential claims compared to common shareholders, as equity shareholders receive dividends only after preference payments have been made. Dividend obligations to creditors, bondholders, and preference shareholders are settled first. If no dividends are approved, the type of shares an investor holds makes no difference.

Information on dividend distribution for the specified period (quarter/year) is published on a company’s website in advance.

Cumulative preference shareholders carry the right to receive dividends for missed periods or dividends in arrears. Holders of equity shares, however, cannot claim unpaid dividends from the past.

Risk and Return Profile Differences

Preference shares generally carry a fixed rate of return on investment, making them attractive for portfolio diversification, especially for those with lower risk tolerance seeking predictable asset allocation and capital gains. The rate can be revised by a shareholders’ meeting, but any increase is capped. Equity shares, on the other hand, may offer a higher dividend yield and significant capital appreciation, depending on the company’s performance. However, they are also more exposed to market fluctuations.

From a risk perspective, preference shares are considered to be lower-risk investments due to their priority in payments and lower market volatility.

Types of Equity Shares

Types of equity shares:

• Class A / Class B / Class C shares. Different classes of equity shares with different voting rights per share.
• Fractional shares. A share of equity that allows investors to invest with smaller amounts. Dividends are calculated proportionally.
• American Depositary Receipts (ADR). Securities confirming ownership of shares in a foreign company listed on the US stock market.

There are many ways to classify stocks, for example, into multibagger and value stocks, blue chips and penny stocks, or redeemable shares.

Types of Preference Shares

Types of preference shares:

• Cumulative preferred shares. Unpaid dividends accumulate and must be paid off before common shareholders receive dividends. They make the income more reliable, yet they often yield a lower return compared to the broader market.

Example: From 2022 to 2024, the general meeting of shareholders chose to reinvest net profits instead of paying dividends. In 2025, dividends were declared. Preference shareholders then received their fixed dividends for 2022–2025, and the remaining profits were distributed to equity shareholders.

• Non-cumulative preferred shares. Shareholders are not entitled to claim dividends for previous periods. If the company reports a loss, no dividends are paid. As for advantages, non-cumulative shares are priced at a lower rate and offer higher liquidity in case of redemption.
• Convertible preferred shares. An investor has the right to exchange preference shares for ordinary shares, which enhances investment options and aligns with diverse financial instruments. In terms of convertibility, equity shares cannot be exchanged for preference shares.
• Redeemable/perpetual preferred shares. In the first case, the issuer must redeem the shares within a certain period specified in the issue terms. Such redemption often helps the company raise capital to meet financial needs or adjust its investment strategy. In the second case, the prospectus does not set a maturity date, and there is no fixed timeline for returning capital to investors.
• Fixed-rate/floating-rate preferred shares. Preference shares usually have a fixed dividend rate, calculated as a percentage of their nominal value. However, some preference shares have a floating rate, though these are less common.

Preference shares are often compared to bonds. Both securities pay dividends based on their nominal value rather than their market price, and their holders receive payments first.

Benefits and Limitations: Preference Shares vs Equity Shares

For an investor from Europe or Asia who has purchased $1,000 worth of Apple shares, voting rights at the shareholders’ meeting are unlikely to matter. What really matters is the difference in yield between the two types of shares:

• Preference shares typically provide a fixed income based on their nominal value. For example, if the nominal value of a share is $100, the current market price is $120, and the dividend rate is 5%, the investor earns 100 * 0.05 = $5. Even if the market price falls below the nominal value, the dividend income remains unchanged.
• Equity shares generate income that depends on shareholder decisions. Net profit is first allocated to preference shareholders, and the balance is then distributed to equity shareholders. For example, if an investor receives $6 and the share price is $120, the dividend yield is 6 ÷ 120 = 5%.

Note: The percentage yield is the same, but the actual dividend amounts differ.

What distinguishes preference shares from equity shares? The table below shows the differences between the two.

Preference shares are often seen as more secure because they offer a stable dividend rate, which is not lost even if the company skips several quarterly or annual payments. In practice, this stability is visible in the dividend yield, calculated as total dividends divided by the current share price.

If the nominal value of a share is $100 and the dividend rate is 5%, the annual dividend is $5. If the market price falls to $10, the dividend yield becomes 5 ÷ 10 = 50%. For regulators, such an unusually high yield signals financial stress for the company, and intervention may result in the suspension of dividend payments.

Interesting fact: On some stock exchanges, you can buy a unit, which is a tradable package that combines different classes of a company’s shares under a single ticker.

Three types of shares of Klabin, one of the top 10 companies in terms of capitalization, are traded on Brazil’s Stock Exchange:

• KLBN11 is a unit that combines 1 KLBN3 common share and 4 KLBN4 preference shares. Investors in KLBN11 receive the rights and dividends of the underlying securities: one voting right from the KLBN3 share and priority dividends from the KLBN4 shares. The entire package of shares trades under a single ticker.

Equity or common shares are usually priced a bit higher than preference ones. However, if you buy 3 preference shares and 1 common share separately, the total cost is 18.56 BRL, while a unit trades for less. Units give investors a way to combine both types of securities in a single instrument, averaging out the price and helping to diversify the investment portfolio.

Conclusion

Let’s summarize the article:

• Preference shares are suitable for conservative investors who are counting on a steady, predictable dividend income.
• The dividend rate on equity shares may be either higher or lower than the dividend rate on preference shares. This depends on the amount of funds allocated by shareholders for dividends.
• Holders of both types of shares may receive no payments at all, if decided by shareholders or the regulator. At the same time, a company may issue new shares at a discounted price to raise capital for future growth.

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