Shares that carry ownership restrictions and confer different rights and privileges to different shareholders
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A share class or share classes are usually created from various types of shares in a company. The type of shares and share classes that a company can create is determined and guided by its articles of association, also referred to as articles of incorporation.
Shares classes that are created by a company carry ownership restrictions and confer different rights and privileges to diverse shareholders. The rights and privileges are with regards to voting and non-voting rights, non-receipt or receipt of dividends, dividend timing and quantum, the entitlement of profits, rights to capital, and other factors depending on the circ*mstances of the company.
The types of shares in which share classes are created from are largely common shares and preferred shares. The diagram below outlines the share types:
Companies create different share classes for the following reasons:
- To keep control of the company and retain strategic decision-making (usually by founder members)
- To attract investment
- To direct dividend income to certain shareholders and determine income distribution patterns
- To retain voting rights to a powerful group of shareholders and restrict voting to another class
- To motivate and retain employees
- To defend against hostile takeovers
Public companies can issue different sorts of shares classes out of splitting ordinary shares. The classes differ from company to company and fund to fund. The most common classes are as follows:
Class A Shares
Public companies can issue Class A shares to new investors when they float their stock through an IPO. Class A shares typically come with one vote for each share. Holders of Class A shares are also entitled to a dividend and rights to a share of capital in the case of the company being wound up. Hence, they may enjoy fewer benefits than Class B when it comes to dividends, liquidation, and voting rights.
Class B Shares
Class B shares are created by corporate companies out of common and preferred shares. The shares characteristically offer more voting rights, income entitlements, and rights to capital. Holders of Class B shares can receive as much as 10 votes or more per share and are typically reserved for the founding members and early investors.
Class C Shares
Class C shares normally don’t provide voting rights. Examples of companies with Class C shares on their share register include Alphabet (GOOG), CommerceHub (CHUBK), and Under Armour (UA.C). Some Class C shares offer very few voting rights – such as Coca-Cola Company (1/20) and Match Group (1/100).
Class D Shares
Class D mutual fund shares are also termed no-load funds. They do not include front-end load charges, back-end load, or level load charges. They also come with the lowest expense ratio compared to other share classes. Class D shares are usually available through discount brokers, and fees are charged per transaction – payable to the broker.
Class I Shares
Class I shares are institutional shares that are made available to institutional investors and shareholders, and high net-worth investors. They can carry higher minimum investment amounts of $25,000 or more. Other investors can choose to pool their investments together through 401(k) plans and invest through mutual fund Class I shares.
Investors need to speak to a financial advisor when choosing a class of shares to invest in. It is also crucial to find an investment advisor who is not affiliated with any specific fund or biased towards a certain fund. Investors should be able to explain and update their financial status, investment objectives, and investment horizon.
Class A and Class B shares are typically suitable for long-term investment and financially capable investors who can meet the high expense ratios. Class C shares are typically suitable for short-term investments, which is appropriate for investment beginners.
The low expense ratio for Class C shares is also appropriate for small and individual investors. Other considerations include discounts provided by a share class, whether it is a loaded or no-load fund, the expense ratio an investor can handle, and the affordability of the minimum investment amount.
- Raising capital for start-up companies by issuing non-voting stock ensures that there is no dilution of control by founding members and no participation in a profit-sharing plan by other shareholders.
- Assigning high voting powers to a specific share class guarantees promoters and founder members retention of management control.
- Corporations can also control the dividend due to each investor by issuing specific share classes.
- Protection of the company in case of winding up where other share classes would receive a return on capital, while others will be limited or denied.
- Ensuring specific shareholders receive dividends before other share classes are eligible.
Related Readings
CFI is the official provider of the global Capital Markets & Securities Analyst (CMSA®)certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:
FAQs
What is an example of a share class? Let's take Google's parent company, Alphabet. They have Class A (one vote per share) and Class B (10 votes per share) stock. Class A is for most investors, while Class B gives founders more control over the company.
What is A share class in a fund? ›
Some mutual funds offer investors different types of shares, known as "classes." Each class invests in the same portfolio of securities and has the same investment objectives and policies. But each class has different shareholder services and/or distribution arrangements with different fees and expenses.
What is my share class? ›
A share class is a designation applied to a specified type of security such as common stock or mutual fund unit. 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; these carry different rights and privileges.
What does class A share means? ›
In finance, a class A share refers to a share classification of common or preferred stock that typically has enhanced benefits with respect to dividends, asset sales, or voting rights compared to Class B or Class C shares.
What is the most common share class? ›
They are usually divided into classes—the most popular being Class A and Class B shares.
How do you determine share class? ›
The type of shares and share classes that a company can create is determined and guided by its articles of association, also referred to as articles of incorporation. Shares classes that are created by a company carry ownership restrictions and confer different rights and privileges to diverse shareholders.
Should I buy class A or C shares? ›
Investors generally should consider Class A shares (the initial sales charge alternative) if they expect to hold the investment over the long term. Class C shares (the level sales charge alternative) should generally be considered for shorter-term holding periods.
How do class shares work? ›
A class of shares is a type of listed company stock that is differentiated by the level of voting rights shareholders receive. For example, a listed company might have two share classes, or classes of stock, designated as Class A and Class B.
Is it better to own Class A or B shares? ›
Class A shares generally have more voting power and higher priority for dividends, while Class B shares are common shares with no preferential treatment. Class C shares can refer to shares given to employees or alternate share classes available to public investors, with varying restrictions and voting rights.
What is an ETF share class? ›
Listed and unlisted ETF share classes allow investors to access the same investment strategy via different distribution channels. Investors can choose the listed share class of a mutual fund or an unlisted share class of an ETF depending on which is more efficient from a portfolio construction perspective.
Having different classes allows the company to have shareholders with different rights. For example, the founders of a company (i.e. the people setting up the company) may subscribe for voting shares and ensure that all other shareholders subscribe for non-voting shares.
What is an income share class? ›
An income share is a class of shares offered by a dual-purpose fund; this share class pays out distributions and dividends to its investors. Income shares are one class of shares in a dual-purpose fund; they can be compared to capital shares, which are their counterpart in a pooled dual-purpose fund offering.
What are the benefits of Class A shares? ›
Class A shares are the type of shares of the company which is considered to be most privileged in terms of its voting rights, conversion rights, ownership rights, dividend rights, and liquidation priorities, and these shares are generally allotted to the top-level management to provide the proper control of the company ...
Can Class A shares be sold? ›
Class A shares refer to a classification of common stock that was traditionally accompanied by more voting rights than Class B shares. Traditional Class A shares are not sold to the public and also can't be traded by the holders of the shares.
Are Class B shares worth anything? ›
Class B mutual fund shares are seen to be a good investment if investors have less cash and a longer time horizon. To avoid the exit fee, an investor should typically remain in the fund for five to eight years.
What are the common share classes? ›
Class A shares generally have more voting power and higher priority for dividends, while Class B shares are common shares with no preferential treatment. Class C shares can refer to shares given to employees or alternate share classes available to public investors, with varying restrictions and voting rights.
What is an example of different classes of shares? ›
These can include:
- Ordinary Shares. Ordinary shares are the most common type of shares. ...
- Preference Shares. Preference shares confer some preferential rights on the holder, superior to ordinary shares. ...
- Redeemable Preference Shares. ...
- Convertible Preference Shares. ...
- Treasury Shares.
Example of shares
For example, say ABC Ltd. issued stock and you purchased 100 shares of it. If each share represents 0.1% of ownership, you own 10% of the company. The company issued stock, and you bought shares of it.
What is the difference between A share class and a series? ›
A series is a subset of a class of shares. If provided for in its articles, a corporation can issue a class of shares in one or more series. The articles may also authorize the directors to create and designate a class of shares in one or more series.
