Preference and Equity Capital

Preference and equity capital are two forms of financing that companies can use to raise capital for their operations or growth.

Preference capital refers to a type of capital that provides investors with priority over equity shareholders in terms of dividend payments and in the event of the company’s liquidation. Preference shares typically pay a fixed dividend, which is agreed upon at the time of issue, and do not usually carry voting rights. This makes preference capital a hybrid between debt and equity financing, as it has characteristics of both. The cost of preference capital is typically higher than the cost of debt but lower than the cost of equity.

Equity capital, on the other hand, refers to the funds that are raised by companies through the sale of common shares or equity ownership in the company. Equity capital does not require the repayment of principal or interest like debt and preference capital, but instead provides shareholders with a share of the company’s profits and voting rights. The cost of equity capital is generally higher than the cost of debt or preference capital due to the higher risk involved.

Preference and equity capital have different characteristics and advantages. Preference capital provides companies with a lower cost of capital compared to equity capital, while equity capital provides companies with the flexibility to raise capital without incurring debt and without having to make fixed dividend payments. However, preference capital may limit the company’s ability to make dividend payments to equity shareholders, while equity capital may dilute the ownership and control of existing shareholders.

Overall, companies need to carefully consider their financing options and the costs and benefits of each type of capital before deciding which option is best for their specific needs and circumstances.