Voting Shares

Updated on April 8, 2024
Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What Are Voting Shares?

Voting shares give the preference to the holder to vote in matters of the company decision-making and policies, which allow the person to vote specifically for the selection of the board of directors and other governing affairs of the company.

Voting Shares

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Voting shares give the holder of it the power or authority to decide how the company’s management should look, especially regarding the selection of the board of directorsBoard Of DirectorsBoard of Directors (BOD) refers to a corporate body comprising a group of elected people who represent the interest of a company’s stockholders. The board forms the top layer of the hierarchy and focuses on ensuring that the company efficiently achieves its goals. read more. It gives the investor the authority to decide how the corporate policy of a particular company should be framed and has the power to accept or reject certain critical decisions like acquisitionAcquisitionAcquisition refers to the strategic move of one company buying another company by acquiring major stakes of the firm. Usually, companies acquire an existing business to share its customer base, operations and market presence. It is one of the popular ways of business expansion.read more or mergersMergersMerger refers to a strategic process whereby two or more companies mutually form a new single legal venture. For example, in 2015, ketchup maker H.J. Heinz Co and Kraft Foods Group Inc merged their business to become Kraft Heinz Company, a leading global food and beverage firm.read more or buyback.

How Does Voting Shares Work?

Stock or shares of a company generally means equity ownership of the company holding one or a million shares matters the same, i.e., and One is considered the owner of the company. Companies also use this distributed ownership model to raise capital for the company and use it for further operations or expansion. Thus, we primarily have two types of shares: voting or common shares and preferred sharesPreferred SharesA preferred share is a share that enjoys priority in receiving dividends compared to common stock. The dividend rate can be fixed or floating depending upon the terms of the issue. Also, preferred stockholders generally do not enjoy voting rights. However, their claims are discharged before the shares of common stockholders at the time of liquidation.read more. Here we are going to talk about how does it work.

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Example

Let’s take an example of the type of shares issuedShares IssuedShares Issued refers to the number of shares distributed by a company to its shareholders, who range from the general public and insiders to institutional investors. They are recorded as owner's equity on the Company's balance sheet.read more by the internet giant Google. Google has three types of shares that it issues, and they are as follows: Class A, Class B, and Class C. The three shares are distinctive in their ways.

Advantages

There are a few advantages and disadvantages of the concept. Let us look at the advantages first.

  • The returns generated from this are proven to be rewarding regarding capital gains and dividends received.
  • The holders of such shares can participate in the company’s decision-making and its policies.
  • They can issue a kind of internal corporate governing methodology through the practice of their voting rights.
  • They have a certain degree of freedom to dictate how the company should be run and who should be on the board of directors.
  • The number of shares one owns is equal to the number of votes; thus, their opinion becomes even stronger when they own a massive chunk of the shares.
  • Though dividend is not guaranteed, there may be issues with some dividends if the company feels like it.
  • When they are issued, the power gets distributed evenly. It is not held by a few people or the company owners and their families. It brings about the distribution of ownership and transparency.
  • The decision making becomes much more democratic in case of the issue of voting shares, and a lot of people get involved.
  • The legal liabilities pertaining to the shareholders are limited and restricted.
  • The shares are very liquid and can be easily traced.

Disadvantages

Some disadvantages of the concept are given below.

  • They are the last ones to receive compensation in times of bankruptcy since preferred shareholders need to get paid first.
  • The dividend they receive is not guaranteed as preferred shareholders need to get paid on a guaranteed basis.
  • It is a high-risk associate’s investment because if the company fails to perform or goes bankrupt, the shareholders have to part off their investments straightaway.
  • Voting shares are limited and not issued in huge numbers like the preferred shares, so the common public accessing such shares is complicated.
  • If the company issues such shares in large numbers, this will dilute the ownership percentage of the existing shareholders. This will lead to less control and the share value will also go down.
  • The company may face risk of takeovers. If the management does not work in favour of the interest of the business, and above that if the ownership and control of voting shareholders are very diluted, then competitors may easy gain control of the management of takeover the business.
  • Sometimes, there may be a conflict of interest among voting shares if the management gives more priority to their own personal interests and does not look at growth and expansion of the business overall.

Voting shares have both upsides and downsides. On the one hand, where the holder enjoys the power to vote and get involved in the crucial decision-making scenarios of the company, on the other hand, there is also a high risk involved because once the company gets bankrupt, his/her investment can go for a toss. Also, the shares issued in these criteria are limited in numbers, so it is very tough to access such shares unless one has a stronghold with the company’s management. They play a bigger role in terms of the count of shares because the more shares one holds, the more votes one is allotted because one share is typically counted here as one vote.

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This article has been a guide to what is Voting Shares. We explain it with examples along with its various advantages and disadvantages. You may learn more about financing from the following articles –

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