What are B Shares?
Class B shares mean the class of shares issued by the company, which offers less advantageous rights to the shareholders than Class A shares. The shareholders of Class B shares have lower voting rights than those of Class A.
The classification lets businesses categorize their investors and prioritize them based on the classes of shares allocated to them. In the case of class B shares, the investors have lower priority with respect to repayment in case of bankruptcy.
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B Shares Explained
B shares are one of the classifications of investors, who have access to limited rights in the company compared to class A shares. A company may issue various classes of sharesClasses Of SharesShare class is the company’s bifurcation of its shares into different classes on the basis of their voting rights, privileges, ownership restrictions. For example dividing the common stock into class A shares having the most privileged voting rights and class B shares which have less voting rights..
Whenever an investor decides to invest in the shares of a particular company, he should carry out detailed research concerning the class of shares being issued. It may happen in some private companiesPrivate CompaniesA privately held company refers to the separate legal entity registered with SEC having a limited number of outstanding share capital and shareowners. that the top-level management of the company, including promoters or other significant stakeholders, are provided with the class of shares carrying more voting power than the shares being offered to the general public. The higher voting rights will give the shareholders greater decision-making power.
Let us take an example to understand this concept in a better manner.
A company named Alpha Ltd issues two classes of shares to its investors. Class 1 entitles the investor to three votes. Class 2 shares, on the other hand, entitles the investor to five votes. Here, the holder of Class 2 shares gets higher voting rights than Class 1 shares. So, Class 1 shares can be called Class B shares as they entitle the investor to lower voting rights.
It is important to note here that the investor should read the investment proposal or other documents concerning shares issued to understand which shares are classes. They should not get influenced by the terminology given by the company, as it may be misleading. For example, the company may name a class of shares as B shares, but it may entitle the investor to more voting power.
Investing in B shares provides the following benefits –
- The initial charges or commission involved in purchasing these shares are less.
- The fees payable on the sale of such shares may be exempted if held for a certain period, say, five years or more extended period.
- The investors of Class B have an option to convert the shares into Class A if they hold them for a particular period, ordinarily long term.
The following are a few disadvantages –
- The investors of such shares enjoy lower voting rights.
- The holders of Class B are given lesser priority in the event of dividend distribution than the holders of Class A.
- The annual maintenance fees are high
B Shares Vs A Shares
As already stated, a company may divide stocks into various classes, be it class A or B. The difference between A shares and B shares are as follows:
- The significant difference is that the voting rights available to the holders of B shares are less than that of Class A sharesClass A SharesClass A shares represent the common stocks category, which provides the shareholders with superior rights to voting, conversion, ownership, dividend, and liquidation. These shares cannot be publicly traded in the open market and are generally allotted to the company's top management.. However, as explained above, it is vital to analyze the company’s charter and other relevant documents to investigate which class of share carries higher or lower voting rights, rather than just accepting the classification allotted by the company.
- The charges relating to purchasing Class A shares will be more than that of B shares.
- However, annual expenses for B shares are more like that in the case of Class A shares;
- The sale of Class B shares is subject to charges when sold.
- Companies give less priority to the investors of Class B than Class A when it comes to dividend distribution.
This has been a guide to what are B Shares. Here we explain vs A shares along with examples, advantages, and disadvantages. You can learn more about finance from the following articles –