Difference between equity shares and preference shares and debentures

Asked by admin @ 20/08/2021 in Business Studies viewed by 288 People

Answered by admin @ 20/08/2021

What is the difference between debenture, preference, and equity shares?

All three of these are items of liability and equity through which companies raise funds for it’s operations. However they differ from each other by the following facts :

(I) Debenture is an acknowledgement of a debt by the company. Or simply, it means that a company is indebted to a person who is holding a debenture of that company. The holder of debenture is entitled to receive interest on a timely basis BUT THE POSSESSION OF DEBENTURE DOES NOT MAKE HIM A MEMBER OF THE COMPANY. Such interest will be paid to debenture holders even if the company is suffering a loss. Debentures are treated as either a non current liability or a current liability, according to their tenure for maturity.

(II) Preference Share is a category of the share capital of a company which gives some preferential rights to it’s holder over that of an equity share holder. Few of such preferential rights are :

(a) payment of dividend before payment of the same to equity shareholders

(b) accumulation of unpaid dividends (during years of loss) in case of cumulative preference shares

(III) Equity Shares undertake the maximum risk associated with a business venture since it’s holders are those category of members who will get benefited (get paid) only after paying off all the other liabilities INCLUDING preference share holders. They form the primary category of owners’ equity and also hold the right to vote during the general meetings of the company which, preference shareholders DO NOT USUALLY HOLD.

Difference between equity shares and preference shares and debentures

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