Distinguish between the following.

1) Equity shares and Preference shares.

                                                Equity Shares

                                         Preference Shares

1. Meaning:

Equity shares have no priority right while receiving dividend and repayment of capital at the time of winding up of the company.

Preference shares carry preferential right in respect of dividend payment and repayment of capital in winding up of the company.

2. Rate of dividend:

Equity share holders are given dividends at fluctuating rates depending upon the profits of the company.

Preference share holders get dividends at fixed rate.

3. Voting right:

Equity shareholders enjoy normal voting rights. They participate in the management of their company.

Preference shareholders do not enjoy normal voting rights They can vote only on matters affecting their interest.

4. Nature of capital:

Equity share capital is permanent capital. It is known as ‘Risk capital’.

Preference share capital is ‘safe capital’ with stable retum.

5. Nature of investor:

Investors who are ready to take the risk to invest in equity shares.

To get an immediate return, an investor invests

in working capital.

Investor gets


less return.

6. Face value:

The face value of equity shares is generally Rs. 1/- or Rs. l0/- It is relatively low

The face value of preference shares is relatively higher i.e. Rs.100/- and so on

7. Types:

Equity shares are classified into

a) equity shares with normal voting right

b) equity shares with differential voting right

Preference shares are classified as

a) Cumulative preference shares

b) Non-cumulative preference shares

c) Convertible preference shares.

d) Non-convertible preference shares

e) Redeemable preference shares.

f) Irredeemable preference shares.

g) Participating preference shares

h) Non-participating preference shares

8. Benefit of right shares and bonus shares: Equity shareholder is entitled to get the right shares and bonus shares.

Preference shareholders are not eligible for the right shares and bonus shares.

9. Capital appreciation:

The market value of equity shares increases with the prosperity of the company. It leads to an increase in the Value of shares.

The market value of preference shares does not fluctuate. So there is no possibility of capital appreciation.

10. Risk: Equity shares are subject to higher risk. That is because of the fluctuating rate of dividend and no guarantee of refund of capita

Preference shares are subject to less risk. It is because of the fix rate of dividends and preferential rights as regards dividend and repayment of capital.

2) Shares and Debentures



1. Meaning:

It is the smallest unit in the total share capital of the company.

A debenture is an instrument under seal evidencing the debt.

2. Nature

It is permanent capital. It is not repaid during the lifetime of the company.

It is a temporary capital. Generally, it is repaid after a specific period.

3. Status:

Share capital is ownership capital. A shareholder is the owner of the company.

Debenture capital is borrowed / loan capital. A debenture holder is a creditor of the company.

4. Voting rights:

Shareholder being owner enjoys voting rights. Shareholders participate in the management of the company.

The debenture holder being the company’s creditor does not have any Voting rights. He can not participate in the management of the company.

5. Return on investment:

Shareholders are paid a dividend. Equity shareholders receive a dividend at a fluctuating rate whereas preference shareholders receive a dividend at a fixed rate.

Debenture holders are paid interest at fixed rate. Interest is paid even when the company has no profit.

6. Security:

Share capital is unsecured capital. No Security is offered to the shareholder.

Debenture capital being loan capital is secured by creating a charge on its property.

7. Time of issue:

Shares are issued in the initial stage of the company.

Debentures can be issued at the later stage when the company has securities to offer.

8. Types:

Shares are classified into two:

a) Equity shares

b) Preference shares

Debentures are classified as

a) Registered debentures

b) Bearer debentures.

c) Secured debentures

d) Unsecured debentures

e) Redeemable debentures

t) Irredeemable debentures

g) Convertible debentures

h) Non-convertible debentures.

9. Position on liquidation:

On liquidation of a company, shareholders rank last in the list of claimants.

Debenture holders being creditors rank prior to shareholders for repayment on liquidation of the company.

10. Suitability:

Shares are suitable for long term finance.

Debentures are suitable for medium-term finance.

3) Owned capital and borrowed capital.

                                            Owned Capital

                                     Borrowed Capital

1 Meaning:

It is that capital that is contributed by shareholders.

It is that capital is borrowed from creditors. It is also known as debt capital.

2. Sources:

This capital is collected by issue of equity shares and preference shares.

It is collected by way of issue of debentures, fixed deposits, a loan from a bank/financial institution, etc.

3. Return on Investment:

The shareholders get dividends as income on their investment. The rate of dividend is fluctuating in the case of equity shares but fixed in the case of preference shares.

The debt capital holders get interested as income on their investment. Interest is paid at a fixed rate.

4. Status:

The shareholders are owners of the company.

The debt holders are creditors of the company

5. Voting right:

The equity shareholders enjoy normal voting right at the general meeting.

The creditors do not enjoy voting rights at the general meeting.

6. Repayment of Capital:

The shareholders do not enjoy priority over creditors. They are eligible for repayment of Capital only after making payment to creditors at the time of winding up of the company.

The creditors get priority over the shareholders in case of return of the principal amount at the time of winding up of the company.

7. Charge on assets:

The shareholders do not have any charge on the assets of the company.

The secured debenture holders have a charge on assets of the company.