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.
- The difference between Class A shares and Class B shares is usually in the number of voting rights assigned to the shareholder.
- Class A shares are common stocks, as are the vast majority of shares issued.
- 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. 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. They entitle the owners to vote at annual meetings, where board members are elected and company decisions are made.
If a company falls into bankruptcy and is forced to liquidate, common stock shareholders are the last to be paid after creditors, bondholders, and preferred shareholders.
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 on 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.
For some investors, the amount of voting rights they have matters little as long as they believe those with more clout are making the right decisions. It may begin to matter only 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 Berkshire Hathaway, the company run by legendary investor Warren Buffett. The company's Class B stock is traded at $208.96 as of March 5, 2020, while its Class A stock was valued at $315,000.
Buffett allowed his company's shares to rise into the stratosphere because 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, 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.
Class B stock should not be confused with preferred stock. Preferred shares are a different type of asset. 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.