Q.Distinguish between Equity Shares and Preference Shares.

The capital a company raises by issuing shares is its share capital; the capital is divided into small units called shares, each with a nominal (face) value, and the holder is a shareholder. A company issues two types: equity shares and preference shares.

Equity shares are the most important source of long-term ownership capital. Equity holders get no fixed dividend — they are residual owners, paid whatever is left after all other claims, so they bear the greatest risk (though liability is limited) and, through voting rights, participate in management. Equity is permanent capital raised without any charge on assets and gives the firm creditworthiness, but returns fluctuate, it is costlier than other sources, and fresh issues dilute existing holders' control and earnings.

Preference shares carry a preferential position: a fixed rate of dividend paid before equity, and repayment of capital at liquidation before equity (but after creditors). They have a hybrid character — like debentures (fixed return) and like equity (dividend only from post-tax profit at directors' discretion) — and usually carry no voting rights, so they do not dilute equity control. However, their dividend is not tax-deductible, the rate is often higher than debenture interest, and there is no assured return. Preference shares can be cumulative/non-cumulative, participating/non-participating and convertible/non-convertible.