Equity shares are also known as ordinaryshares. They are the form of fractional or part ownership in which the shareholder, as a fractional owner, takes the maximum business risk. The holders of Equitysharesare members of the company and have voting rights. Equity shares are the vital source for raising long-term capital.

Equity shares represent the ownership of a company and capital raised by theissue of such sharesis known as ownership capital or owner’s funds. They are the foundation for the creation of a company.

Equity shareholders are paid on the basis of earnings of the company and do not get a fixed dividend. They are referred to as ‘residual owners’. They receive what is left after all other claims on the company’s income and assets have been settled. Through their right to vote, these shareholders have a right to participate in the management of the company

Preference Shares

Preference sharesare the shares which promise the holder a fixed dividend, whose payment takes priority over that of ordinary share dividends. Capital raised by theissue of preference shares is called preference share capital.

The preference shareholders are in superior position over equity shareholders in two ways: first,receiving a fixed rate of dividend, out of the profits of the company, before any dividend is declared for equity shareholderand second,receiving their capital after the claims of the company’s creditors have been settled, at the time of liquidation. In short, the preference shareholders have a preferential claim over dividend and repayment of capital as compared to equity shareholders.

Preference Shares and equity shares