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Comparing Equity and Preferred Shares: Which is Right for You

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Published Date: 13 Oct 2023Updated Date: 13 Oct 20236 mins readBy MOFSL
Equity and Preferred Shares

Introduction

Two primary categories of shares that investors can choose are equity shares and preferred shares. These shares offer different rights and advantages, and understanding these differences is crucial for informed investing.

What are Equity Shares?

Equity shares, also known as ordinary shares or common shares, give investors ownership of a company. When an investor purchases these shares, they become a shareholder and gain some rights and privileges, which include the right to vote at shareholder meetings and the potential to receive dividends.

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Key characteristics of equity shares

Voting Rights: Equity shareholders typically have voting rights in company matters, such as electing the board of directors or approving major corporate changes.

Dividends: Equity shareholders may receive dividends, but these payments are not guaranteed. The company's board of directors decides whether to distribute dividends and in what amount.

Risk and Reward: Equity shareholders, since they have ownership of the company, bear both the growth and the losses of the company in terms of share price changes.

Residual Claims: In the case of liquidation or winding up of the company, equity shareholders have a residual claim on the company's assets after all debts and preferred share obligations have been satisfied.

What are Preferred Shares?

Preferred shares, as the name suggests, come with certain preferences and priorities over equity shares. These shares combine elements of both equity and debt instruments, offering investors a degree of stability and income in addition to potential capital appreciation.

Key characteristics of preferred shares

Dividend Priority: Preferred shareholders receive fixed or adjustable dividends, and they have a higher claim on company profits than equity shareholders. In the event of dividend payments, preferred shareholders are paid before equity shareholders.

No Voting Rights (Usually): Most preferred shares do not come with voting rights, which means preferred shareholders typically do not participate in company decisions.

Lower Risk: In the event of financial troubles or liquidation, preferred shareholders have a higher chance of receiving their investment back before equity shareholders.

No Residual Claims: Preferred shareholders do not have a claim on the residual assets of the company after satisfying their dividend entitlements. This is in contrast to equity shareholders who have residual claims.

How to Choose Between Equity and Preferred Shares?

The choice between equity and preferred shares depends on an investor's financial goals, risk tolerance, and income needs. Equity shares offer higher growth potential but come with more risk and uncertainty, while preferred shares provide stability through consistent dividends, but with a limited upside for capital appreciation.

Conclusion

Equity shares represent ownership with voting rights and capital appreciation potential, while preferred shares offer dividend priority and stability. Careful consideration of these distinctions can help investors tailor their portfolios to meet their financial objectives and risk preferences.

 

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Disclaimer: The stocks, companies, or financial instruments mentioned in this blog are for informational purposes only and should not be considered as investment recommendations. It is advised to consult with your financial advisor before making any investment decisions. Investment in securities markets are subject to market risks, read all the related documents carefully before investing. Investors are strongly encouraged to carefully read the risk disclosure documents prior to participating in market-related investments or trading activities. Due to the volatile nature of financial markets, no guarantees can be made regarding investment returns. Motilal Oswal Financial Services Ltd. does not offer any assured returns on market-linked securities. Please note that past performance of stocks or indices is not indicative of future results.
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