You can invest in a company in myriad ways, and one such channel is mutual funds. They are one of the most popular wealth-accumulating financial avenues in the past few years. It is important to note that companies classify their shares into various classes. Each share class carries a distinct set of privileges like shareholder rights, rights to capital, voting rights, dividend rights, and a few others based on the company’s needs.
As an investor, you have to be wary about the share class type you are purchasing. It defines and determines the rights you are authorized to hold concerning a company. In this article, let’s dive into the concepts of share classes and their types.
What is a Share Class?
Investors who buy shares from a company are vested with different rights. There are three types of share classes – Class A, Class B, and Class C. Each share class comes with multiple charges like front-end load, back-end load, deferred charges, 12b-1 fee, etc. The fee structure is different for each share class. Whether you’re buying common stocks or mutual fundsunits, it’s critical to have some basic know-how on that particular asset class. Now, companies group shares because of several reasons. Here are a few of them enlisted below.
- To designate a level of ownership to the investor based on the share class.
- To have a command over the company and keep the decision-making rights with the board.
- To allocate the dividends and dictate the income as per the share class.
- To grant and limit voting rights based on the investors’ share classes.
- To protect the company from opposed buyouts.
Share classes are distributed or introduced to the investors when a private company decides to go public. Thus, they bifurcate the shares into categories and rank them in order. The type of share class you purchase decides your credibility and say, inside and within the company. Eventually, this helps investors choose the share type based on a sundry of parameters like affordability, needs, risk, future goals, returns, etc.
Finally, when a privately owned company issues shares to the public, it’s implicitly selling a partial stake of its entity to the investors. For example, Asian Paints sells 30% of its stake to investors by issuing 100 shares. Buying one share of Asian Paints grants you 3.33% of the possession in the company. While this is a simple use case, in reality, companies deal with them in millions.
Types of Share Classes
Companies can raise capital in three different ways. They can either borrow money from friends and family or go for a bank loan. They go for the third option, i.e., public borrowing, especially when it’s about millions. That kind of money can only be generated from the outside. So, they issue shares by grouping them into varied classes – Class A, B, and C. Let’s understand about each share class in brief.
Class A Shares:
Companies issue Class A shares when they go public through an IPO. These shares are also called common stock or shares. This class of shares holds voting rights in the company and have more weight than any other share class issued in the company. Investors who buy Class A shares are accredited to get a part of profits made by the company.
These shareholders are given the right to enunciate their concerns, suggestions, and advice in the annual meetings held by the company. These investors also get a share of dividends when the company makes sound returns. Even during the liquidation, these shareholders are the first to be paid.
Class B Shares:
Unlike Class A shares, this share class has fewer voting rights in the company matters. They are like second-best shares with fewer benefits. The front-end load for these shares is comparatively low. Also, investors don’t need to pay any back-end load, if and only if they hold them for a long horizon.
Class C Shares:
If you are an investor on a quest for a short-term investment, then Class C shares fit your bill. Upon buying these shares, they’ll be front-end load, followed by the level load for managing your investments and 1% back-end load when you draw out. These share class holders also don’t have any voting rights in the company.
Benefits of Different Share Classes
The classification of share classes includes the following benefits:
- Regardless of the division of the shares, the company grants the power to control the shareholders. These share classes decide to what extent you have the ownership and control rights in the company. Overall, this division helps the investor and the company manage their rights and privileges.
- It helps investors pick a suitable share class that meets their investment obligations. Class A and B are for long-term investors, and Class C is for short-term investors
- It helps investors in generating income by earning dividends on their investments.
- When the company endures liquidation, the assets get distributed to the investors in their respective proportions. The share type helps the company decide the ratio at which the assets get apportioned to the shareholders. Also, each class has its curbs and stipulations.
- It helps companies in generating capital, as well as helps investors in diversifying their portfolios. So, it’s a win-win strategy for both parties.
- It creates hierarchy and structure in the company.
