December 23, 2022
Newcomers to individual investing might find assets that have different share classes, which can be confusing to understand. So in this Insights, we are going to take a look at share classes and what the different classes mean to retail shareholders.
Share classes can be found in stocks and mutual funds. A company’s board can set different share classes as it sees fit. The company does that because it might want to keep voting control in a few hands by establishing different voting rules for different share classes.
Simply put, share classes assign different rights to different individual investors. Classes can define things like dividends, voting rights and define ownership of the company’s assets and capital.
Again, the company sets the parameters for its stock classes. For example, the company might issue “ordinary” Class A shares with one vote per share and also issue Class B shares that might give executives additional votes, perhaps 10 votes per Class B share (or 100 votes, again it is up to the company). The alphabetic markers – Class A vs. Class B, for example – identify the benefits you have as a shareholder, though the naming is arbitrary and a Class A share of one company might give the retail investor different rights than Class A shares of another company.
The share classes are designated by corporate charters. The company sets the definitions of each class and can define them as they please also long as the classes do not violate a shareholder’s legal rights.
A few different shareholder rights are defined by share classes that can include: non-voting shares – shares with no votes regarding corporate governance; common or ordinary shares – shares typically with a single vote and access to dividends and corporate assets without priority; executive shares – often with priority voting rights and multiple votes per share; preferred shares – shares that pay regularly scheduled designated dividends, often greater than common shares (and often paid first); and deferred shares -- the opposite of preferred shares where the shareholder may receive a smaller dividend payment (often paid last).
No share class is better or worse than any other. A retail stockholder might want deferred shares, for example, if they don’t care about dividends and are focused on financial returns only. Retail shareholders can also score valuable stock perks by signing up for a free TiiCKER account and connecting a brokerage.
Mutual funds also have share classes, which according to Investopedia, carry different sales charges, expense ratios, and minimum initial investment requirements.
Most retail shareholders will have limited choices, often between common or preferred shares. Those investors looking for a steady stream of income from dividends might consider preferred shares and those whose goal is building capital might consider common shares.
An increasing number of companies – many in the tech sector – are issuing shares with fewer voter rights. For example, Alphabet (Tii:GOOGL), the parent company of Google, has Class B shares with 10 votes each and are not publicly traded. Class A shares of Alphabet have just one vote and Class C shares have no voting rights at all.
It is important to understand share classes and the rights each class gives retail shareholders.
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