The stock class is a classification that describes the different types of shares a company can issue. Different classes of stock in the same company can grant varying amounts of ownership or voting rights within the company. This provides companies with greater flexibility when raising funds through selling equity rights.
Definition and Examples of Stock Classes
When companies wish to raise money by selling an ownership stake in the company, they can do so by selling shares. Investors can buy those shares and trade them with other investors in the open market.
In many cases, companies sell only one class of stock. However, some companies choose to sell multiple different classes of stock. Each class has unique characteristics, such as representing different amounts of ownership or offering different voting rights. In some cases, only one class of stock is publicly traded, while another class is held privately and subject to selling restrictions.
The basic types of stock are common stock and preferred stock. Common stock represents the majority of shares available in the market, while preferred stock typically comes with more guaranteed dividends and more stable prices, but it does not carry voting rights.
How Stock Classes Work
When a company chooses to issue shares, it has the freedom to create multiple classes of shares and determine the number of shares it will issue. This way, the company can create the ownership structure it desires, such as granting some shareholders greater voting rights.
Companies can sell shares as part of an initial public offering (IPO) or by issuing shares that were not previously issued. They may also create new classes of shares during a stock split.
The rights conferred by different classes of stock can lead to variations in their value, even if they represent the same ownership stake in the company. For example, at the end of May 26, 2021, the value of the GOOG – Class C share of Alphabet was $2433.53, compared to the GOOGL – Class A share of the company, which was $2380.81.
Classes of Mutual Fund Shares
For mutual funds, as mentioned, the share class typically reflects the fees that the owner has to pay. There are four classes of shares for mutual funds: A, B, C, and I, which will be explained in detail below.
Class A Shares: Typically involve upfront fees (the fees paid when purchasing shares) but impose lower ongoing fees. Some funds offer lower upfront fees with larger purchase amounts. Class B Shares: Typically involve deferred fees (the fees paid when selling shares). In most cases, the deferred fee decreases when the investor holds the shares longer. This class also tends to impose lower ongoing fees than other share classes. Class C Shares: Typically do not impose sales fees but have higher ongoing fees than other classes of shares. Class I Shares: Typically available only to institutional investors but generally impose the lowest fees of all share classes. They usually have a high minimum investment requirement. In some cases, these share classes are available to individuals through employer-sponsored retirement plans.
Advantages and Disadvantages of Stock Classes
Advantages
- Provides companies with greater flexibility when raising funds
- Allows investors to choose the mutual fund fee structure that works for them
Disadvantages
- Increases
- Multiple stock classes add complexity to investing
- Choosing the wrong stock class may lead to poor performance
What does this mean for individual investors?
Having different classes of stocks means that individual investors need to pay attention to what they are investing in and make sure they are buying the correct class of shares.
For example, if you are buying shares in Alphabet Inc. because you want to have voting rights in the company, you should ensure you are purchasing class A shares that offer voting rights rather than class C shares that do not provide voting rights.
Similarly, if you are buying shares in a mutual fund that contains multiple classes of shares, you should make sure to purchase the class that has a better fee structure for your investment strategy and goals. This means you need to take the extra step to research the different stock classes and check the fund’s prospectus for more information.
Key takeaways
- A class of stock is a classification that describes the different types of shares a company can issue.
- Stock classes operate in different ways and give companies greater flexibility when raising capital.
- Individual investors should pay attention to the class they are buying and ensure they are purchasing the correct class in accordance with their goals and strategies.
Source: https://www.thebalancemoney.com/what-is-a-class-of-shares-5189348
Leave a Reply