Class A Shares vs. Class B Shares: An Overview
The difference between Class A shares and Class B shares of a company’s stock usually comes down to the number of voting rights assigned to the shareholder. Class A shareholders generally have more clout.
- Class A shareholders usually have more voting rights than owners of other classes of stock.
- The difference is relevant only to shareholders who want an active role in the company.
- When more than one class of stock is offered, companies traditionally designate them as Class A and Class B.
Class A Shares
Class A shares are common stocks, as are the vast majority of shares issued by a public company. Common shares are an ownership interest in a company and entitle their purchasers to a portion of the profits earned.
Investors in common shares are usually given at least one vote for each share they hold. This entitles the owners to vote at annual meetings, where board members are elected, company decisions are made, and shareholders are allowed to voice their concerns.
If a company falls into bankruptcy and is forced to liquidate, common stock shareholders are last in line for compensation.
Class B Shares
Theoretically, a company can create any number of classes of shares of common stock. In reality, the decision is usually made in order to concentrate voting power within a certain group of people.
When more than one class of stock is offered, companies traditionally designate them as Class A and Class B, with Class A carrying more voting rights than Class B shares. Class A shares may offer 10 voting rights per stock held, while class B shares offer only one. It depends on how the company decides to structure its stock.
Setting aside the issue of voting rights, different classes of common stock almost always carry the same equity interest in a company. Therefore, shareholders of all classes have the same rights to share in company profits. That is, they have the right to share in any dividends that are approved by the board of directors.
For most investors, voting clout doesn't matter much as long as they believe those with more clout are making the right decisions. It may begin to matter if they feel the company is going off-course and they don't have the votes to help force a change.
The difference between Class A and Class B stock is vividly demonstrated by the classes of stock issued by Berkshire Hathaway, the company run by legendary investor Warren Buffett. The company's Class B stock traded at $208.96 as of March 5, 2020, while its Class A stock was valued at $315,000.
For many years, Buffett refused to allow a stock split while its price rose into the stratosphere. He preferred to concentrate voting power in the hands of relatively few investors. In 1996, he finally decided to create a Class B to attract small investors.
There's no substantive difference between the two stocks, except that a share of Class B stock has 1/1500th the value of a Class A share and a corresponding fraction of its voting power.
About Preferred Stock
Class B stock should not be confused with preferred stock. Preferred shares are a different type of asset. In fact, they are a kind of hybrid between a stock and a bond.
Generally, owners of preferred stock are entitled to a dividend, and it must be paid out before any dividends are paid to the owners of common stock. In addition, preferred stock owners have repayment priority over common stockholders in the event of the company's liquidation.
Preferred stocks are far less volatile than common stocks. That fact, and the guaranteed dividend, makes them a popular choice for conservative investors and retirees seeking an income supplement.