When investing in the stock market, you may come across several classes of shares. A class of shares, such as Class A or Class B, can be important for voting rights, dividends and long-term share value. If you're wondering what are classes of shares, then follow along to learn about them and how to make the best investment decisions when buying shares of stock.
The Short Version
- Classes of shares determine the right of the stock owner.
- Most shares on the stock market are known as common stock, which are regular shares that include general voting rights.
- Preferred shares don't have voting rights, but shareholders usually receive a higher dividend and have better protection in the event the company goes bankrupt.
What Is a Class of Shares?
In investing, a class of shares designates the rights of a stock's owner. Some companies may have just one class of shares. Other companies opt for a more complex model with multiple share classes.
Share classes are commonly used to preserve voting power for company founders or early investors as more investments flow into the company. For example, in a filing with the SEC, Facebook explained that it planned to create a nonvoting public share class that allows for additional investors to buy stock without diluting Mark Zuckerberg's control over the company.
In the example of Facebook, owners of Class C shares wouldn't have any voting rights. Investors pushed back and Facebook ultimately dropped the idea. However, the company still maintains a share structure where Class B shares have 10 times the voting rights of Class A shares. If you're planning to invest in Facebook, that difference is significant for your voice as a shareholder.
In other cases, different share classes represent different ownership stakes in the company. They could indicate preferred vs. common shares of stock. And this impacts dividend payments and shareholder rights during a bankruptcy.
Companies have a lot of freedom in designing their share classes, so it's important to know what you're buying when investing.
Types of Shares
Most stock floating around on the stock market is common stock. Common shares, or ordinary shares, are regular shares. Owners of these shares can vote on certain company policies and could get a slice of profits through dividends. As a stock market investor, you're most likely buying common stock. These voting shares also have more of a say in the company. But owning a few common shares doesn't mean you have a large say. The voting rights of stockholders vary by the different classes and the different rights of shareholders, which is usually outlined by the company.
Preferred shares usually don't have voting rights at all. Instead, preferred shareholders may earn a high dividend payment that is prioritized over common stock dividends. In a bankruptcy, preferred shareholders have more protections than common stock owners. In many ways, a preferred share works more like a perpetual bond than a share of stock.
The Different Share Classes
In addition to common vs. preferred stock, you may come across shares listed as Class A shares or Class B shares. When you see Class A and Class B shares of a stock, you should be on the lookout for differences in voting rights. As with Facebook, one class may have more voting power than another. And this makes it a better investment choice in some cases.
A company could hypothetically create as many share classes as it wants. There could be Class C shares, Class D shares and so on. Shares may have the same equity value (price) despite having less voting power. But that's not always the case, as we'll see in the examples below.
Why Are There So Many Different Types of Shares?
There are many reasons a company may want to create different types of share classes. Having various share classes can help the company maintain control by retaining voting rights on key strategic decisions.
It's also a way for companies to attract investment at different stages. And having shares that pay dividend income to certain shareholders helps with income distribution. Shares can even be issued to employees to help motivate and retain talent.
And in worst case scenarios, shares can be used by companies to defend against hostile takeovers. Companies do this by allowing current shareholders to purchase shares for a steep discount, making the proposed acquisition more difficult.
Class of Shares Example
While it's interesting to read about stock market class of shares, it's more fun to see different share classes in action. Here are three examples from public companies traded in the U.S. stock market today.
Berkshire Hathaway, a conglomerate built by legendary investor Warren Buffett, split the company's ownership structure between highly valued Class A shares and lower-cost Class B shares.
The move was made to allow for Berkshire's acquisition of BNSF Railway, which needed share values far lower than the cost of a Class A share. Class B shares have the equity rights of 1/1,500th of a Class A shareholder and 1/10,000th of the voting power. As of this writing, a Class A share is worth $444,654.00 (yes, you read that right) while a Class B share is worth $294.49.
Alphabet, the parent company of Google, runs with four share classes. Class A shares have one vote per share and Class B shares get 10 votes per share. Class C shareholders get no voting rights. Alphabet also issued shares of preferred stock.
If you're looking to invest, you can find Class A shares under ticker GOOGL and Class C shares listed as GOOG. Class B shares are held only by cofounders Sergey Brin and Larry Page and a select few executives. This gives them effective control over the company.
Love him or hate him, Peter Thiel is a shrewd businessman. The PayPal cofounder went on to found secretive technology company Palantir. This company has a complex stock structure. It uses Class A shares with one vote each, Class B shares with 10 votes each, and Class F shares with no more than 49.999999% of the voting power.
Not surprisingly, this gives Peter Thiel and other Palantir leaders control over the company for life. This is good for Thiel but not so great for the other shareholders who have little voice for their investment in the company.
How to Decide Which Share Class to Invest In
To decide which shares are best to invest in, conduct a fundamental analysis, which you can find out how to do in our technical vs. fundamental analysis guide. This helps you find an estimated value per share to determine whether a stock is undervalued or overvalued.
As a guideline, it's often better to have more voting power than less. If you're deciding between GOOG and GOOGL, for example, you're better off with Class B shares that have 10x the votes. You still won't have control over the company, but at least you'll have a voice and an opportunity to vote for directors and other decisions. It's better to have more voting power than less.
For common vs. preferred stock, most people should invest in common stock. Preferred stock is better for a fixed-income investment strategy.
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Shares of stock are an essential investment, but not all shares are created equal. Before clicking the buy button, take the time to understand exactly what you're buying and the rights you have as a shareholder. When you do, you should be on a better path for investment success.