When you decide to buy stock in a company, you do your homework. You know what the company sells, how they perform in the marketplace, and what the risks are that they face. You’re ready to make that purchase. But now you need to decide: Do you want to buy Class A shares? Or Class B, or Class C? What’s the difference? Here’s what you need to know.
Different Share Types
Companies will sometimes issue more than one type of stock. The different share types may have different voting rights, and some may be the result of a merger with another company. Here are some of the share types you may encounter.
Common Shares or Ordinary Shares
Common shares are – naturally – the most common types of shares. Common shares are typically sold on the open market. The owner of a common share of stock typically has one vote at shareholder meetings. Common shares may pay dividends, but other classes of stock may get their dividends first.
Preferred shares may pay a dividend before common shares. Preferred shares often do not have voting rights. In the event of a bankruptcy or liquidation, preferred shareholders are paid before common shareholders.
Nonvoting shares do not have voting rights. They may be offered to an employee as part of their compensation package.
Executive shares and advisory shares are usually held by the top management in the company. They may have voting rights greater than those of common shareholders, but the ability to sell the shares is usually limited.
Companies can define their shares any way they want, and they will use the class designations A, B, or C, as they choose. So, one company’s preferred stock may be Class A shares, while another company’s common stock may be Class A shares.
Here’s an example of how a company might issue different share classes of stock.
- Class A shares may be Common Stock, with each share getting one vote. The holders of these shares may receive dividends, at the discretion of the company.
- Class B shares may be Preferred Stock. The shareholders of class B shares have no voting rights. When dividends are paid, they are paid to Class B shareholders first. Only if there is sufficient cash remaining will Class A shareholders receive a dividend. If the company must liquidate its assets, Class B shareholders have priority over Class A shareholders.
- Class C shares may be Executive Stock, which is given to the top management of the company as part of their compensation package. Each Class C share has 10 votes. Class C shareholders receive the same access to dividends and assets as Class A shareholders; that is, after Class B shareholders. Class C shares cannot be traded on the open market.
This is just an example, and companies may use different classifications or have different voting rights than the ones illustrated here.
Why Do Companies Issue Different Share Classes of Stock?
Companies may have more than one share class so they can control who has voting rights and who does not. They may use different share classes as a way to ensure that majority shareholders are company insiders.
Google offers an object lesson in share classes. Alphabet, Google’s parent company, has three share classes of stock. Class A common stock, traded under the ticker symbol GOOGL, has one vote per share. The company’s Class C capital stock, traded under the ticker symbol GOOG, does not have voting rights.
Alphabet also has Class B common stock, which is owned nearly exclusively by Google’s top three executives. The Class B shares represent over half of the voting power of all the company’s voting stock, which means that the three executives can make all the decisions for the company. As long as they are in agreement, they cannot be outvoted by the Class A common stockholders.
While one share class of a given company may be no better or worse than another, it’s important to know what you’re buying. So be sure you understand the attributes of the different share classes before you make that purchase.