A:

Firstly, do not confuse different classes of common stock with preferred stock. Preferred shares are an entirely different type of security, affording their owners priority dividend payments and a higher position on the priority ladder in the event of a company's liquidation or bankruptcy. Common stock represents the lower-ranked (and much more prevalent) form of equity financing. However, a company can choose to issue different classes of common stock to certain investors, board members or company founders.

Generally, companies that choose to have multiple classes of common stock issue two classes, usually denoted as Class A and Class B shares. Common practice is to assign more voting rights to one class of stock than the other. For example, a private company that decides to go public will usually issue a large number of common shares, but the occasional company will also provide its founders, executives or other large stakeholders with a different class of common stock that carries multiple votes for each single share of stock. Commonly, the "super voting" multiple is about 10 votes per higher class share, although occasionally companies choose to make them much higher. Usually, Class A shares are superior to Class B shares, but there is no standard nomenclature for multiple share classes - sometimes Class B shares have more votes than their Class A counterparts. Because of this, investors should always research the details of a company's share classes if they are considering investing in a firm with more than one class.

Usually, the purpose of the super voting shares is to give key company insiders greater control over the company's voting rights, and thus its board and corporate actions. The existence of super voting shares can also be an effective defense against hostile takeovers, since key insiders can maintain majority voting control of their company without actually owning more than half of the outstanding shares.

Voting issues aside, different share classes typically have the same rights to profits and company ownership. Thus, even though retail investors may be limited to purchasing only inferior classes of common stock for a given company, they still enjoy a proportionally equal claim to the company's profits. In these cases, investors see their fair share of a company's returns on equity, although they do not enjoy the voting power their shares would normally provide in the absence of dual classes. Provided the large stakeholders who own the disproportionate voting shares are successful in running the company, this should be of little concern to investors - especially the typical retail investor who has a very tiny stake in the company anyway. Normally, the existence of dual class shares would only be a problem if an investor believed the disproportionate voting rights were allowing inferior management to remain in place in spite of the best interests of shareholders.

(For further reading, see The Two Sides of Dual-Class Shares and Good Governance Pays.)

RELATED FAQS
  1. Do convertible bonds have voting rights?

    Convertible bonds usually have no voting rights until they are converted. Even after conversion, they may not be granted ... Read Answer >>
  2. If I own a stock in a company, do I get a say in the company's operations?

    You don't get a direct say in a company's day-to-day operations, but, depending on whether you own voting or non-voting stock, ... Read Answer >>
  3. Why are mutual fund investment minimums different?

    Discover why mutual funds carry different minimum investments, and learn about benefits that come with investing in funds ... Read Answer >>
Related Articles
  1. Small Business

    How Zuckerberg Will Control Facebook Forever (FB, GOOG)

    Zuckerberg has pledged his wealth for charity, which includes his Facebook stock ownership. Here's how he will still control the Facebook business forever.
  2. Investing

    The ABCs Of Mutual Fund Classes

    Do you understand how the various types of shares differ? We give you the pros and cons of each.
  3. Investing

    What is an Asset Class?

    A group of securities that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same laws and regulations.
  4. Investing

    Value Traps: Bargain Hunters Beware!

    Find out how to avoid getting sucked in by a deceiving bargain stock.
  5. Insights

    Is The Middle Class Really Disappearing?

    Find out exactly what "middle class" means and whether it's really getting rarer.
  6. Managing Wealth

    Top 5 Differences Between Business and First Class

    Is it worth the extra cost to fly first class instead of business class?
  7. Insights

    A Breakdown on How the Stock Market Works

    Learn what it means to own stocks and shares, why shares exist, and how you buy and sell them.
  8. Investing

    Google Stock: A Tale of Two Share Classes (GOOG, GOOGL)

    Google stock comes in two different flavors with different rights for shareholders.
  9. Investing

    Under Armour Issues Class C Shares (UA)

    This move by the Maryland-based company ensures that going forward, founder and CEO Kevin Plank maintains control of the company he founded in 1996.
RELATED TERMS
  1. Class B Shares

    A classification of common stock that may be accompanied by more ...
  2. Share Class

    A designation applied to a specified type of security such as ...
  3. Dual-Class Ownership

    A type of share division in which companies issue shares that ...
  4. Dual Class Stock

    The issuing of various types of shares by a single company. A ...
  5. Multiple Capital Structure

    The classification of a company's stock and bond offerings into ...
  6. Classified Shares

    The separation of company equity into more than one class of ...
Hot Definitions
  1. Two And Twenty

    A type of compensation structure that hedge fund managers typically employ in which part of compensation is performance based. ...
  2. Life Insurance

    A protection against the loss of income that would result if the insured passed away. The named beneficiary receives the ...
  3. Price Elasticity Of Demand

    A measure of the relationship between a change in the quantity demanded of a particular good and a change in its price. Price ...
  4. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying ...
  5. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  6. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
Trading Center