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. What is the difference between Class A shares and other common shares of company's ...

    Discover how a company can break down its common stock into multiple classes and how these classes differ from one another ... Read Answer >>
  2. Which class (class A, B, C) shares should I purchase if my time horizon is long term, ...

  3. What is the difference between Berkshire Hathaway's Class A and Class B shares?

    Learn why Warren Buffet created Berkshire Hathaway Class B shares and discover the main differences between Class A and Class ... Read Answer >>
  4. How can I structure my investment to increase my decision making ability in a company?

    I want to acquire a 45% equity stake in a company. What is the best way to structure the deal so that I have a significant ... Read Answer >>
  5. Is there a time frame where B and C shares do not have back end fees? And do you ...

  6. How are a mutual fund's C shares different from A and B shares?

    Learn how a class C share differs from a class A or B share in relation to a mutual fund. Read Answer >>
Related Articles
  1. Investing

    What are Class B Shares?

    Class B shares are one classification of common stock issued by corporations.
  2. Investing

    Keeping Control of Your Business After the IPO

    Taking a company public doesn't mean founders must completely give up calling the shots. Before the IPO, consider these tactics to keep control after it.
  3. ETFs & Mutual Funds

    Which Fund Share Class is Best for Retirement?

    Mutual funds are a popular investment for retirement. Here's how to choose the best share class when investing in them.
  4. Investing

    What is the Importance of a Share's Class?

    The meaning of share classes varies, depending on the investment vehicle.
  5. Insights

    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.
  6. Managing Wealth

    What's Behind So Many Mutual Fund Share Classes?

    Despite the confusion they create, the number of share classes offered by mutual fund families will most likely continue to grow. Here's why.
  7. ETFs & Mutual Funds

    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.
  8. ETFs & Mutual Funds

    The ABCs of Mutual Fund Classes

    There are three main mutual fund classes, and each charges fees in a different way.
  9. Markets

    What Is Tenure Voting?

    This stockholder voting structure, one of three types, has advantages and disadvantages. Here’s a look at the pros and cons of all three.
  10. ETFs & Mutual Funds

    Value Traps: Bargain Hunters Beware!

    Find out how to avoid getting sucked in by a deceiving bargain stock.
RELATED TERMS
  1. Class B Shares

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

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

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

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

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

    The classification of a company's stock and bond offerings into ...
Hot Definitions
  1. Glass-Steagall Act

    An act the U.S. Congress passed in 1933 as the Banking Act, which prohibited commercial banks from participating in the investment ...
  2. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  3. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  4. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  5. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  6. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
Trading Center