Share Classes Definition
Share class is the company’s bifurcation of its shares into different classes on the basis of their voting rights, privileges, ownership restrictions such as dividing the common stock into A shares having the most privileged voting rights and B shares who have less voting rights and so on.
In simple terms, it means dividing the shares into different “classes” of shares in order to confer different rights to a different types of shareholders. These rights could be from voting rights, entitlement to profits, rights to dividends and capital, a different purpose and features depending on the shareholders’ requirements, etc.
Mark Zuckerberg, CEO of Facebook, has approximately 54% voting rights in the company, where he holds 28 % of class B shares – which provides 10 votes per share – to its shareholders. This makes us say that Mark Zuckerberg has high voting right within the company.
Here is the list of Most Common Classes of Shares –
Top 7 Alphabetical Class of Shares
1 – A Shares
Classification of common shares or preferred class shares which have lesser benefits in terms of dividend, asset sales, and voting rights, when compared to the other class of shares. These Class A shares might be convertible to another class at a favorable rate.
In the case of Mutual Funds, this class has a front-end load attached for the investors which are approximately 6% of the amount invested.
2 – B Shares
Classification of common or preferred shares that have different voting rights than A-shares. In the case of Mutual Funds, this class does not usually charge a front-load but instead, they charge contingent deferred sales charge (CDSC) or simply the “back end load”.
Also, B shares can be converted to A-share after a certain duration of holding, which is mostly seven to eight years.
3 – C Shares
It is a type of Mutual fund share which is characterized by the level load which includes the annual charges of the fund as a fixed percentage to its investors. The charges include expenses around marketing, distributions, and servicing. The charges or load is just about 1% of the fund
The investor pays for these throughout the year unlike A where charges are paid when the fund/ shares are bought or B where charges are paid when the fund/ shares are sold. Also, class C shares mostly have lower expense ratios than B shares, but higher than the A-shares.
C shares are non-convertible to any other class of shares.
4 – D Shares
It is a type of Mutual fund share which is characterized as a no-load fund. These are usually available through the discount brokers and therefore, fees in terms of the commission are attached with transactions done. These fees are directly paid to the broker.
5 – I Shares
These are the Institutional shares that are available for institutional shareholders and investors. Institutional mutual fund share classes have the lowest expense ratios among the other mutual fund share classes.
This class of shares is usually used by fund companies as an investment option for the institution. These institutions have a minimum investment of $ 25,000. The class of fund or shares have a low-cost structure and no load.
6 – R Shares
R class of shares is designated for work-based retirement accounts. This class of mutual fund shares is available through the retirement plan which is mostly employer-sponsored, such as the 401(k).
These shares are not available in the open market and do not carry any sales charges. However, like other, R shares carry the annual expenses towards a mutual fund.
7 – Z Shares
This class of shares is made available to the employees of the fund house that is managing the fund. These shares might be available to the employes in two options – either by way of purchase or as a part of their compensation.
Example of Multiple Share Class: Google and its Parent Company Alphabet Inc
The symbol GOOG represents class C while GOOGL ticker represents the A shares. Clearly, C shares do not have any voting rights whereas A shares which are the GOOGL shares have one vote each for the shares. The share classes for the company are divided into 2 classes after the company got split in stocks having Alphabet Inc named as the parent company.
There are B shares as well as Google but they are owned by the employees and early investors. Each of them has the right to ten such shares which, therefore, also makes them have super-voting powers. These shares are, however, not available in the open market.
It came into the picture when Google decided for a stock split due to the formation of Alphabet Inc as a parent company. Therefore, shareholders of Google stocks got entitled to one share of the voting stock of GOOGL and one share of the non- voting GOOG stock for each share held.
Advantage
- It helps the promoters of any company to retain its management control and give limited control to the shareholders.
- Providing control to some set of shareholders for the dividend due to each class of shareholder.
- In case of winding up of the company, limiting or denying certain shareholders the right to return of the company’s total capital.
- One set of shareholders would receive a return of capital and fixed dividend percentage before the other classes of shareholders.
- Raise equity share capital, mostly for startup companies, without diluting the control of the founder members so that the decision making remains easy without others participating in a profit-sharing plan.
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