When investing in a company, investors need to pay attention to the class of shares they’re buying. This article will cover how different classes of shares work and why they’re important.
Definition and Examples of Classes of Shares
When companies want to raise money by selling an ownership stake in the business, they can do so by selling shares. Investors can purchase those shares and trade them with other investors on the open market. In many cases, companies sell just one class of shares. However, some companies choose to sell multiple different classes of shares. Each class has unique properties, such as representing a different amount of ownership or offering different voting rights. In some cases, only one class of shares is publicly traded, while another is privately held and has restrictions on sale. The two primary types of stock are common shares and preferred stock. Common shares represent the majority of shares that are available on the market, while preferred stocks typically come with more guaranteed dividends, have more stable prices, but do not have voting rights. One real-world example of a company with multiple classes of shares is Alphabet, the parent company of Google. The company has two classes of shares, which are traded under the tickers GOOG and GOOGL. GOOGL shares are class A shares and give the owner one vote for each share owned. GOOG shares are Class C shares and offer no voting rights. There are also privately held Class B shares owned by the company’s founders and insiders. These offer 10 votes per share. Alphabet chose this particular stock structure in part to allow Google’s founders to retain full control over the company. The founders ended up with 51% of the voting power in Alphabet. Alternate name: classes of stock; share class
How Classes of Shares Work
When a company chooses to issue stock, it has the freedom to create multiple classes of stock and determine how many to issue. This way, the company can create the ownership structure it desires, such as giving certain shareholders more voting power. The rights granted by different classes of stock can create differences in their value, even if they represent the same ownership stake in a business. For example, at closing on May 26, 2021, GOOG—Alphabet’s Class C stock—was valued at $2,433.53, compared to GOOGL, the company’s Class A stock, which was worth $2,380.81.
Mutual Fund Share Classes
For mutual funds, as mentioned, the class of share typically reflects the fees the owner must pay. There are four classes of shares for mutual funds: A, B, C, and I, all explained in detail, below.
Class A shares: Typically involve a front-end sales load (fees paid when buying shares) but charge lower ongoing fees. Some funds offer lower front-end loads with larger purchase amounts. Class B shares: Typically involve a back-end sales load (fees paid when selling shares). In most cases, the back-end load decreases as the investor holds shares for longer. This class also tends to charge lower ongoing fees than other classes of shares. Class C shares: Usually don’t charge sales loads but have higher ongoing fees than other classes of shares. Class I shares: Typically only available to institutional investors but tend to charge the lowest fees of all share classes. They also generally have high investment minimums. In some cases, these classes of shares are available to individuals through employer-sponsored retirement plans.
Pros and Cons of Classes of Shares
Pros Explained
Companies have more flexibility when raising money: Business owners who want to raise money by selling shares can retain more control over their company. They can do this by selling shares with less voting power than the shares they own.Investors can choose the mutual fund fee structure that works for them: Investors can choose the class of mutual fund shares with fees that work for their situation. For example, long-term investors can choose a class of shares with no front-end load and back-end loads that decrease over time.
Cons Explained
Having multiple classes of shares adds complexity to investing: If a single business or fund sells multiple classes of shares, investors need to pay attention to the class of share that they’re purchasing. In some cases, they may purchase a share they did not intend to.Investors who choose the wrong class of shares may underperform: Different classes of shares will perform differently. For mutual funds, fees can have a major impact on performance. So, in some cases, an investor who chooses the wrong class could pay more in fees, reducing returns. But it’s important to note that divergence is more visible in mutual funds than in stocks.
What It Means for Individual Investors
The existence of different classes of shares means that individual investors need to pay attention to the things they’re investing in and make sure they’re buying the right class of shares. For example, if you’re buying shares in Alphabet Inc. because you want to have a voting stake in the business, you need to ensure that you purchase Class A shares that offer voting rights instead of Class C shares, which confer no voting rights. Similarly, if you’re buying shares in a mutual fund with multiple share classes, you have to make sure you buy the class of shares that has the best fee structure for your investing strategy and goals. That means taking the additional step to research different classes of shares and to check the fund’s prospectus for more information.
