We also know equity shares as ordinary shares. These shares have voting rights. Equity share is a main source of finance for any company giving investors the right to vote, share market profits and claim on assets.
We know a share that is not a preference share as equity share. It doesn’t offer a fixed rate of return. They don’t get a fixed rate of dividends. It entitles the whole of the profit of a company to these equity shareholders, only after paying a fixed dividend to preference shareholders.
Advantages of equity shares are it is a permanent source of capital gain and the company has to repay it except under liquidation.
With profits, equity shareholders are the real gainers with increased dividends and appreciation in the value of shares.
Preference shares are those shares that carry certain special or priority rights. First, dividends at a fixed rate are payable on these shares before they pay any dividend on equity shares.
Second, at the time of the winding-up of the company, it repays the capital to preference shareholders before the return of equity capital.
Preference shares do not carry voting rights. However, holders of preference shares may claim voting rights if they do not pay the dividends for two years or more on cumulative preference shares and three years or more on non-cumulative preference shares types.
Advantages of preference shares are the earnings per share of existing preference shareholders are not diluted if fresh they issue preference shares.
Preference shares increase the earnings of equity shareholders, i.e. it has a leveraging benefit.
The preference dividends tax in India is not tax-deductible expenditure.