Shares of stock are the primary securities sold on exchanges such as the New York Stock Exchange or NASDAQ. When you invest in shares of a company, you become a partial owner of that company. This ownership gives you two rights that may interest you: dividends from profit and voting rights for corporate decisions. However, most investors focus on share value and you should, too. If a share isn't considered valuable, it's unlikely to pay out a dividend or have much voting value. You won't get any benefits from it, which is why knowing what class of shares to choose matters when you're purchasing stock.
What Is a Class of Shares?
A class of shares is a grouping of stock that gives holders special voting rights or distribution rights. A corporation can issue multiple classes of shares. Most companies issue just one, and publicly traded companies might issue common and preferred shares where the preferred shareholders are granted certain advantages over common shareholders and are usually paid dividends before common shareholders.
Investors usually think of stocks as being in one class, but there are some companies that have more than one. For example, The New York Times Company has two classes of shares: Class A and Class B. Since both classes have the same value, they trade at the same prices. However, Class B shares are entitled to 10 votes per share while Class A shares receive only one vote per share.
Types of Shares
A company has many options when it comes to the types of shares it issues. It can issue more than one class of stock in order to meet its goals, whether it's giving investors an opportunity to make a profit, making employees feel more invested in the company or raising money for different purposes.
Common Stock
Common equity is the most common type of share issued by a company. The stockholders who own common stock have voting rights on matters such as electing members of the board of directors, approving mergers and acquisitions and other major decisions affecting the direction of the corporation. Common stockholders also receive dividends if the company pays them out.
Preferred Stock
Preferred shares are another type of stock issued by a company that gives shareholders priority treatment over common stockholders when it comes to receiving dividends and if the company dissolves. However, preferred stock doesn't usually have any voting rights. Preferred stocks are often non-convertible stocks, which means that they cannot be converted into common stocks at any time. Common stocks can be converted into preferred stocks if specified in the contract between the corporation and investor.
The Different Share Classes
We have learned that a company's stock has multiple share classes, which are often used to give certain investors more rights. In turn, companies may issue one class of common stock with voting rights and a second class of common stock without voting rights. Also, some companies issue different classes of preferred stock that have various levels of priority over common stockholders in receiving dividends and assets upon liquidation. Some businesses have even issued multiple classes of common shares with different voting rights.
Companies generally offer multiple classes of stock to entice investors with the potential for greater returns while protecting themselves from losing control over their business. For instance, a company might want to raise capital by selling shares to outside investors but doesn't want to give up voting control of its board of directors. Issuing two classes of shares — one with voting rights and another without — allows it to do so while still keeping control of the company.
Some fund managers use different classes of shares to distinguish between their funds' investment goals, such as growth or income, or whether they employ active or passive management styles. For example, an actively managed fund might have a capital "C" after its ticker symbol, whereas a passively managed index fund might have an "S".
Why Are There So Many Different Types of Shares?
There are other differences between classes as well. Some classes provide greater dividend rights than others and some even get preference when dividends are paid out. Preferred shares are similar to bonds in that they pay a fixed dividend and are repaid before common shares if the company declares bankruptcy.
Other types of stock include warrants, which give shareholders the right to buy more stock at a certain price within a certain period, and employee stock options (ESOs), which allow employees to buy their company's stock at a discount. Each type of security has its own set of characteristics and risks that should be considered prior to investing.
In conclusion, share classes are a determining factor in whether you personally can invest in a company’s stock and how much of a percentage of the company your investments will take up. Due to its very nature, understanding share classes takes time and effort. It is also one of the components of an investment that you can control—that you have the power to learn about. And it could be worth your time to do so.