Similarities and differences between Preference Share Capital and Equity Finance

PREFERENCE SHARE CAPITAL (Quasi-Equity) – It is also called quasi-equity because it combines features of equity and those of debt. It is preference because it is preferred to ordinary share capital

EQUITY FINANCE – For small companies, this is personal savings (contribution of owners to the company). For large companies
equity finance is made of ordinary share capital and reserves; (both revenue and capital reserves).

Similarities between Preference and Equity Finance

• Both may be permanent if preference share capital is irredeemable (convertible).
• Both are naked or unsecured finances.
• Both are traded at the stock exchange
• Both are raised by public limited companies only
• Both carry residue claims after debt.
• Both dividends are not a legal obligations for the company to pay.

Differences between Preference and Equity Finance

Ordinary share capital

• Has a residue claim both on assets and profit.
• Carries voting rights
• Reduces the gearing ratio
• Variable dividends hence grow over time
• Permanent finance
• Easily transferable

Preference share capital

• Has a superior claim
• No voting rights
• Increases the gearing ratio
• Fixed dividends hence no growth
• Usually redeemable
• Not easily transferable