When a company goes public, it raises money by issuing stock, where each unit represents an ownership interest. After the company's initial public offering (IPO), shares trade on the secondary market on stock exchanges like the New York Stock Exchange (NYSE) and the Nasdaq. Shares are normally categorized differently based on their rights and who holds them. Common stock is one category, which is reported on a company's balance sheet under the stockholder's equity section. This category of stock can be divided further into different share classes. These are designations assigned to different securities such as common stock or mutual funds. This article looks at different share classes of common stock and what they mean for investors.
- Common stock is categorized as Class A, Class B, etc. shares.
- Companies commonly assign more voting rights to one stock class over another.
- Class A shares typically represent a company's generic common stock.
- Shares with voting power are collectively known as the super-voting class.
Common Stock Classes
As mentioned above, common stock is a type of security that represents ownership in a company. Shareholders with common stock are allowed to vote on certain corporate issues like appointments to the company's board or whether the company should go through with a merger or acquisition. Common stockholders also receive regular dividend payments based on the company's profitability. 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.
But don't confuse common stock with preferred stock—a different type of security altogether. Preferred shareholders are given a higher position on the ladder in the event of a company's liquidation or bankruptcy. This means they're among the first to get paid if the company goes under. They also receive priority dividend payments compared to other shareholders.
Common stock is usually divided into different classes including Class A and Class B shares. Although there is no standard nomenclature for multiple share classes, Class A shares are normally superior to Class B shares. In other cases, the reverse is true. That's why investors should research the details of a company's share classes if they are considering investing in a firm with more than one class.
Voting and Super-Voting Shares
Different share classes also have different voting rights. For instance, a company's founders, executives, or other large stakeholders may be assigned a class of common stock that has multiple votes for every single share of stock. This super-voting multiple is about 10 votes per higher class share, although some companies may choose to make them much higher.
Super-voting shares give key company insiders greater control over the company's voting rights, 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. 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 (ROE), although they do not enjoy the voting power their shares would normally provide in the absence of dual classes.
This should be of little concern to investors as long as larger stakeholders are successful in running the company, especially retail investors who have a very tiny stake in the company. The existence of dual-class shares is only a problem if an investor believes the disproportionate voting rights allow inferior management to remain in place in spite of the best interests of shareholders.
Mutual fund share classes refer to their fee structure rather than voting rights.
Example of Multiple Share Classes
Let's use Google and its parent entity, Alphabet as an example. The company has different share classes, notably:
- Class A shares: These shares trade on the Nasdaq under the ticker symbol GOOGL. Anyone who holds these shares has one vote per share.
- Class C shares: This stock trades on the Nasdaq under the ticker symbol GOOG. Class C shareholders have no voting rights.
- Class B shares: These shares don't trade on the secondary market. Instead, they are owned by Google insiders and early investors who each get 10 votes, making them super-voting shares.
These classes were instituted after a stock split resulting from the formation of Alphabet as the parent company. Anyone who owned Google stock before the split got one share of the voting GOOGL stock and one share of the nonvoting GOOG stock.