Difference between Equity shares and Preference shares

Difference between Equity shares and Preference shares

The financial world consists of both the debt market as well as the equity market and every corporate needs to raise capital by issuing shares, which could be in the form of equity shares, preference shares, etc. However, the prime reason for one to invest in the volatile share market over its debt counterparts is the sheer joy of overperformance.

So, when you consider long-term investment, equity investments turn out to be one of the most profitable ones. Sure, there is the risk of prices going high enough to bring an ear-to-ear smile and low enough to make you regret your decisions at times. But over a considerable period, you could walk away with good returns.

When we discuss shares, there are two types of shares that one can choose between, equity shares and preference shares. But before you can start investing, the most obvious question to ask would be what are equity shares and preference shares.

The Definition

Equity shares and preference shares are quite similar, yet different in the way they function and offer you returns. When you own equity shares of a company, the dividends are subject to how the company is performing. And at times, you might not even receive any dividends.
This is one major difference between equity shares and preference shares. With preference shares, the company is bound to pay you dividends, since the amount is fixed but not with equity shares.

- Equity Shares

When you hear the word shares, people almost always refer to equity shares or ordinary shares. With equity shares, a company offers you partial ownership and thus, involves a lot of business risk.
The members, who own equity shares, also acquire the right to vote for critical decisions in the company. These decisions may include electing a new leader, acquisition, merger, etc. And they play a crucial role in raising capital for the company. Equity capital forms the basic foundation of the company and its creditworthiness.

The dividends or payouts to equity shareholders predominantly depend on the earnings of the company. Once the company has settled all other claims and expenses, it will pay its equity shareholders.

- Preference Shares

Between equity shares and preference shares, it is the latter that offers a certain source of income. With preference shares, a company promises its shareholders a fixed amount as dividend. And the preference shares take precedence over ordinary shares or equity shares.

They also have an edge over equity shareholders when it comes to repaying of capital. Since the rate of dividends is fixed, it is usually compared with debentures.

Salient Differences between equity shares and preference shares

Now that we are aware of the definition of equity shares and preference shares, we can delve into the major differences. Here are some of the key differences when it comes down to equity shares vs preference shares.

- Preference shares have specific rights over ordinary shares or equity shares of a company.

- Preference shareholders do not have any rights when it comes to voting, whereas equity shareholders do. However, under a few circumstances, preference shareholders can gain the right to vote. For instance, if there hasn’t been dividend payment in over two years.

- Preference shareholders do not reserve any claims to bonus shares, while one of the biggest merits of equity shares includes them having access to bonuses.

- Preference shareholders have the right to receive dividends, but equity shareholders do not have any such rights. A dividend is paid out only if the company makes a profit to distribute.

- Also, in a given year, if a dividend is not paid out to preference shareholders, the same would be accumulated and needs to be paid out later. However, the same is not true for equity shareholders. If a dividend is not declared for equity shareholders, the same does not accrue.

- One of the limitations of preference shares is that shareholders do not have any claims in the management of the company, whereas equity shareholders do.

- Preference shareholders can convert their shares to equity shares, but the reverse is not possible.

Other than the salient differences, there is some outright difference between equity shares and preference shares which are worth mentioning. Here are some additional equity shares vs preference shares pointers that you should be aware of.

- The basic description

One crucial equity shares and preference shares’ difference is that equity shares are the foundation of a company, while preference shares give shareholders an edge over ordinary shares. It is offered to banks or large corporates when the company needs funds.
It is one of the biggest merits of preference shares that a company receives funds whenever additional capital is required.

- The rate of dividend

The dividend paying rates of equity shares and preference shares may differ a bit. While there isn’t any fixed rate for paying dividends to equity shareholders, preference shareholders do receive dividends at a fixed rate, which is predefined and can be a nominal value of the share price.The rate of dividend for equity shareholders is decided by the Board of Directors after evaluating the company’s performance in the previous financial year.

- Issuance of shares

It is mandatory to issue equity shares of a company to go public while issuing preference shares is not mandatory under the Company’s Act 2013.

- Trading

You can easily trade equity shares in the capital market, whereas you cannot trade preference shares. This makes them less liquid as compared to equity shares. Thus, the preference shares do not see any price appreciation or depreciation as the equity shares do. Investors do have the option to sell back the preference shares to the company.

- Categories

Another equity shares and preference shares difference come in the form of types. Since equity shares do not have any type, they are normally known as ordinary shares. On the other hand, the different types of Preference Shares include non-participatory or participatory, cumulative or non-cumulative, convertible or non-convertible and so on.

- Cost

The low cost of the equity shares makes them accessible by small investors. On the contrary, the higher price tags on the preference shares make them ideal for medium to large investors.

- Liquidation

In the event of liquidation, the preference shareholders will have the first right to receive any kind of payment after the company’s creditors are paid. While equity shareholders have rights on the assets of the company once all the pending payments are complete.

- Repayment

One of the limitations of equity shares is that a company is not liable to repay the equity shares to its holders, whereas they must repay their preference shareholders.

As discussed in the beginning, equity shares and preference shares are similar yet quite different. Equity shares and preference shares both allow you to own a piece of the company but in various other aspects. So, preference shares are a mix of equity shares and debentures.

The crux of the story is that there are many choices available to invest. However, investing should be done after understanding the instruments and, as per your goals. At IndiaNivesh, we use extensive research to help you achieve your financial goals. Equity investing requires in-depth understanding, analysis, and periodic reviewing. Our team uses one of the best proprietary equity research to make your investment a fruitful one.



Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.


What is SIP & How does SIP Investment Work in India?

What is SIP?Systematic Investment Plan (SIP) is a simple and convenient method for investing in mutual funds. It provides a way of investing a fixed amount of money in any particular scheme of mutual fund at a pre-defined regular interval of time. If you still wonder what is SIP or what is sip in mutual fund; it can be simply explained as a planned tool for investment in which a particular amount is deducted from the account of the investor and is invested in the mutual fund scheme chosen by the investor. The time interval at which the money is being invested in the mutual funds can be daily, monthly, quarterly or half-yearly.Among the mutual fund investors, SIP has become very popular gradually because of the investing discipline it instills in an investor. Moreover, you do not need to worry about the volatility in the market and the timing the market when you are investing through SIP mode. You can make an easy entry into the investment market by starting a SIP. It is always advisable to start your SIP investment at an early age to reap the benefit of power of compounding. Perks of SIPNow that you know what is SIP or what is SIP in mutual fund, let us have a look at the few perks of an SIP investment. Rupee Cost Averaging This is one of the best features of SIP investment. SIP is a “way” of investing in a mutual fund in a disciplined manner such that irrespective of the market situation, one keeps investing a particular amount of money at a predefined date. So, if the market is high, you would get lesser number of units and vice versa. In this way, you eliminate the concept of timing the market and keep investing irrespective of the market situation. Thus, the average cost of investing becomes lower than bulk investing at any point in time, because you invest when the market is high as well as low and thus the average cost of units gets spread over time. This helps in smoothening out the short-term fluctuations in the market for the portfolio. Power of compounding If you continue your SIP investment for a longer period, you will start earning returns on the returns of your investments. This can help you accumulate a healthy corpus over the long term Time- saving investment option SIP investment is a time- saving option and if you are choosing to carry out all the procedure online, it is even more time saving and convenient. Stress- free Since the market fluctuations do not hamper SIP investment it is a stress- free option for the investors. Flexible and affordable SIP is a flexible and affordable investment option as the minimum amount to start a SIP is Rs.500 and you can go on increasing your investment as your income increases with time. Also, there are no charges for starting or stopping a SIP investment. Now since we have discussed in length about what is sip investment, let’s take a real-life example to see how SIP can be used to achieve different financial goals: Rohit, a 33-year-old software engineer by profession who lives with his wife and a son. The two most important goals for Rohit are: to save for his son’s higher education and retirement. Rohit has been investing in conventional products like Bank Fixed Deposits in order to achieve these financial goals. But somehow, Rohit realized that his earnings from the FDs may not be enough for him to achieve his financial goals. The major cause of this shortfall is inflation. The real return he gets on his investments after deducting the inflation rate is very low. So, what should be Rohit’s approach in order to get high returns but without being affected by the fluctuations in the market? One of the good options here is to invest in an equity mutual fund through a SIP. This will help him in achieving his long-term financial goals and will also induce financial discipline into his life. Now, let us have a look at how does mutual fund SIP work and how does SIP work in India. How does SIP work? As said earlier, SIP functions on the principle of regular investments. Now the question arises how does SIP work in India? By starting a SIP, you are investing a defined quantity of money into mutual funds at pre-defined intervals. Your savings account will be debited with that particular amount of money for your SIP on your instruction. After the payment of the SIP is done, the AMC, Asset Management Company or the Mutual Fund house shall assign you with a particular number of units from the selected mutual fund scheme of yours. This assignment of units depends on the NAV or the Net Asset Value for that particular day of the scheme which you have chosen. As you go on paying the installment amount for SIP, you go on adding more units of your scheme. When the market fluctuates, i.e. when the market is up you get less units for your money paid for SIP whereas more amounts of units can be purchased when the market is down. A major feature of SIP is rupee cost averaging. With help of a SIP, you can lower down your investment’s average cost and risk reduction for your investment can be possible by wisely spreading the price of your purchase over time. How to start SIP investment? We have answered what is SIP and what is SIP investment. But, before you actually start investing in SIP, you need to ascertain important things like your financial goals, tenure of your investment, your risk appetite, etc. First, you have to decide about your long-term financial goals. The next important step is to decide on the timeline i.e. by when you would need money to achieve these goals. This timeline once decided will be the tenure for which you will be investing in a SIP. Then, the next vital step is to decide on the amount of money to be invested. You can use a SIP calculator available online to find out the amount of money you need to invest regularly to achieve your goals. Finally, when the amount and tenure are all decided, you can go ahead and consult financial experts to know about the various mutual fund schemes available and choose an appropriate one for you. In the next step, you need to submit your KYC. If the online method of submission is being selected then you can submit the details digitally as well. Mandatory documents like PAN card, address proof, and an identity proof need to be submitted along with the KYC (Know your Client) form. Post this, you will have to complete the IPV procedure i.e. In-person verification. You can again do this in two ways i.e. by visiting the office and submitting the necessary documents or by attending a video conference call using a webcam. This is a part of the KYC process for authentication. Once your KYC is complete, you need to submit the mutual fund application form along with the cheque of your investment amount and the SIP form at the nearest office of a mutual fund house, distributor or an agent. Moreover, you can start your own SIP online as well. You can get details on all plans and schemes on websites like IndiaNivesh and you can easily start the SIP online, provided your KYC is already done. Else, it needs to be completed first, before starting to invest. SIP is a great and extremely convenient way to start investments in mutual funds. Once you completely understand the basics, you can easily realize your different financial goals with help of SIPs.     Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

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Liquid Funds – Best Liquid Funds to Invest in 2019

‘Are mutual funds meant only for long term equity investing? Or Where should I invest my money for secure and steady returns?’These are a few questions that many investors seek answers to. A quick search online for the right fund to invest can make things a bit worse. The presence of numerous categories and funds to choose from can be overwhelming for new investors or sometimes even the seasoned ones. So where should you invest for the short haul? Have you heard about Investing in Liquid Funds? What are they?Liquid funds are open-ended mutual fund schemes that invest in debt market instruments with maturities up to 90 days. Liquid funds are usually associated with lower risks and thus deliver relatively safer returns. Liquid funds primarily invest in instruments such as Treasury bills, commercial papers, government securities and so on.Liquid funds India has a slightly different NAV calculation structure when compared with other mutual funds. The NAV or the net asset value of liquid funds is calculated for 365 days at the same time. Unlike other debt funds where the NAV is calculated at the end of a business day. There is no lock-in period in liquid funds.As is the case with any other mutual funds, you can place a request to redeem NAVs of liquid funds at any point in time. The order to redeem the units will be placed by 2 pm on the current day or the next business day if you miss the time slot. In such cases, the NAV for the previous business day would be considered.Why you should invest in liquid funds?Liquid funds have one of the lowest risks associated as compared to other mutual fund schemes. This makes them ideal for investors who are not willing to take a lot of risks on their investments. And unlike some other funds, liquid funds do not have any exit loads.Even if you invest in the best liquid funds, you may not receive returns like the equity mutual funds. Instead, you will receive a steady stream of income without taking many risks. Liquid funds are ideal for individuals who have some spare cash and are looking for a way to park it.Redemption of mutual fund NAVs usually takes 24 hours to process. If you were to place an order to redeem your units, the earliest it would be done is the next business day. The best performing liquid funds can offer returns anywhere between 6% - 8%, which is much higher than the standard interest rates that banks offer. The low-risk factor along with comparatively handsome returns is what makes liquid funds an interesting proposition. Liquid funds in IndiaAs an investor, you must carry out your due diligence before investing in any mutual fund for that matter. The following are some of the parameters that you must consider before investing in liquid funds.- Fund ObjectivesMost of the instruments that are a part of liquid funds mature within 60 to 90 days. This ensures that there isn’t much fluctuation when it comes to the NAVs. This also prevents major variations in the NAVs. If a rating agency down rates a company, the NAV of even the best liquid funds can take a beating. Though they are not risk-averse, when compared to other mutual funds, you can rely on their stability.- Potential returnsKnowing the kind of returns that you can expect will help you decide with more conviction whether you want to invest in liquid funds India or not. When you consider historic data, liquid funds are known to return between 6% - 8% annually. Now if you look at the interest rates on offer by banks (on an average 4% annually) the liquid funds perform quite well. Though one cannot guarantee returns in mutual funds, in most cases you will be able to redeem your units in the green.How should one evaluate liquid funds?It should not come as a surprise that you would need to do some background work to get your hands on the best performing liquid funds. The following parameters should help you zero down on the top performing liquid funds.- Fund expense ratioMutual funds also require administrative work to be completed in the background. Asset management companies usually charge them via expense ratios. In other words, it shows the operating efficiency of a fund. A lower expense ratio ensures that you will walk away with a higher return percentage.- Returns of the fundIt must be noted that the past performance of even the top performing liquid funds is in no way an indication of the future returns. However, looking into history will help you better assess a fund. Top 8 Liquid funds for 2019The following is a list of the best liquid funds to invest in 2019. Here is a glimpse of the funds and their details briefly. The above list contains some of the best liquid funds 2019 has on offer. You can consider the above funds and take a final call on which fund suits your investment profile. ConclusionThere are a few strong reasons why liquid funds have garnered so much interest in recent years and a place in the portfolio of various investors. Their shorter maturity dates ensure that fund managers are not in a constant tussle to manage redemptions.If you are considering parking your money for a short period, then just take a pick from the best liquid funds. It would offer you stable returns while allowing you to forget about the fund, until any short-term goal demands your attention. The low risk and steady returns make liquid funds, an ideal investment for short to mid-term goals. Investors who have been in the habit of investing in fixed deposits and savings accounts will find the best liquid funds an interesting option to invest in. If you were to receive any dividends on these funds, you need not worry about taxes, since they are tax-free in your hands. To sum up, if you are someone who wants to make their money work hard, then you should definitely not let go of the Liquid Fund option. Our team at IndiaNivesh constantly encourages customers to take advantage of this instrument. Our expert yet friendly team can hand-hold you to getting started and suggest you the best liquid funds to consider.Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

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Now that you understand ULIP meaning, its types and advantages, use our IndiaNivesh platform to invest in a plan as per your insurance and investment needs and enjoy all the benefits that the plan has to offer.   Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

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  • Capital Market – Meaning, Types & Functions of Capital Market

    We all know how various companies and industries raise funds for their short term requirement through the money market. However, when they need funds for long term, capital market is their source. The capital market is just like the money market but with a difference that funds raised in the capital market can be used only for long term. In this article, you will learn about the concept of capital market in detail. Let us first understand what is the capital market? Understanding Capital Market Capital market in simple words means the market for long term investments. These investments have a lock-in period of more than one year. Here, the buyers and sellers transact in capital market instruments like bonds, debt instruments, debentures, shares, derivative market instruments like swaps, ETFs, futures, options, etc. Let us now understand the types of capital market. Types of Capital Market The capital market is of two types i.e. Primary Market and Secondary Market. 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Ways of Raising Funds Offer through Prospectus In the primary market, the prospectus is used to raise funds. The company invites the investors and the general public through an advertisement known as the prospectus to subscribe to the shares of the company. The shares or debentures are allotted to the public on the basis of subscription. If the company receives a high subscription then allotment is done to them on pro-rata basis. The company hires merchant bankers, brokers or underwriters to sell the shares to the public.  Private Placement Some companies try to avoid the IPO route to raise funds as it is very costly. Instead, they give investment opportunity to few individuals via private placement. Here the companies can offer their shares for sale to select individuals, financial institutions, insurance companies and banks. This way they can raise funds quickly and economically. Rights Issue The structure of capital market allows the companies in need of additional funds to first approach their current investors before looking at the other sources for finance. The right issue gives the current investors the first opportunity to make additional investments in the company. The allotment of right shares is done on pro-rata basis. However, if the current shareholders of the company do not want to exercise their rights, the shares can be offered to the public. e-IPO e-IPO means Electronic Initial Public Offer. e-IPO is an agreement between the stock exchange and the company to offer its shares to the public through online mode. It is a fast and speedy process. The company here needs to appoint registrar to the issue and brokers to accept the application received from the public. The above mentioned are the ways of raising funds through the capital market. Let us now learn about the various functions of the capital market. Functions of the Capital Market Helps in the movement of capital from the people who save money to the people who are in need of it. Assists in the financing of long term projects of the companies. Encourages investors to own the range of productive assets. Minimises the transaction cost. Helps in the faster valuation of financial securities like debentures and shares. Creates liquidity in the market by facilitating the trading of securities in the secondary market. Offers cover against price or market risks through the trading of derivative instruments. Helps in efficient capital allocation by way of competitive price mechanism. Helps in liquidity creation and regulation of funds. The above mentioned are the functions of the capital market. The capital market performs its functions with the help of buyers and sellers who interact and transact. The structure of the Indian capital market is well regulated and highly organised. The capital markets may be sometimes termed risky because they do not give fixed returns annually. But when looked from a long term perspective, their performance has always been good and rewarding for the investors. If you want to learn more about the capital market or put your savings in the capital market, you can contact IndiaNivesh Ltd.Disclaimer: "Investment in securities market and Mutual Funds are subject to market risks, read all the related documents carefully before investing."

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