What is a Share Class
A share class is a designation applied to a specified type of security such as common stock or mutual fund units. Companies that have more than one class of common stock usually identify a given class with alphabetic markers, such as "Class A" shares and "Class B" shares. Mutual funds also have share classes but often are determined by how the sales charge is paid.
BREAKING DOWN Share Class
Different share classes within the same entity typically confer different rights to the stock holder. For example, a public company may offer two classes of common stock outstanding: Class A common stock and Class B common stock. This dual-class structure is typically decided on when a company first goes public and issues stock in the primary market. An example is when a private company that is undertaking an initial public offering (IPO) may choose to issue Class A shares to its new investors, while the original owners of the company receive Class B shares. In this case, the Class B shares would typically have enhanced voting rights. A dual-class structure such as this would be used if the original owners of the company wanted to sell the majority of their ownership stake in the firm, but still maintain majority voting rights.
Example of Dual Share Class Stock
As an investor, it's important to know what class of shares you are buying when you purchase common stock in a public company. An example of the dual share class stock is in Alphabet Inc. The company issued an A class, with the ticker (NASDAQ: GOOG) and the C class with the ticker (NASDAQ: GOOGL). Both trade around the same price level but the C class shares do not have voting rights. The company also issued a B class share, but this is reserved for management and other controlling parties.
Mutual Fund Share Classes
Mutual funds have several share classes available for purchase, which are tied directly to how the fund is purchased by an investor. The most common share class is the A share, which is an upfront sales charge. These funds may seem costly in the beginning but may be less expensive if held over the long-term. These upfront sales charges range from 2 to 5.75%, depending on the type of fund and the volume purchased.
The C share class could be used for investors looking to purchase funds without an upfront sales charge, which charges an annual fee for the life of the fund of around 1%. However, C share funds do often have a one-year holding period or a contingent deferred sales charge that may be triggered in the event of an early liquidation. Investors looking to remain in the mutual fund for the long-term should compare the upfront sales charge versus the level charge to determine which is the more cost effective option.
Institutional Share Classes
There are several other mutual fund share classes, which are dubbed to be used on an institutional basis. Share classes like I, R, N, X and Y are all examples of shares available. Mutual funds usually make these classes available only to those with high net worth, typically more than $1 million. Often times companies that give their employees retirement plans will invest in these classes. Institutional shares also usually carry the lowest fees and expenses of mutual fund classes. Because of the low expense ratios, institutional classes invariably garner the best returns of the different classes a mutual fund invests, which will require higher fees.