Shares sold in the share market on behalf of companies are classified into different classes. This differentiation helps in outlining the effective rights of each shareholder of the company.
The shares are offered on the basis of the financial stability of a company and also to have public input in company dealings.
Key Takeaways
- Class A shares come with more voting rights, while Class B shares offer fewer or none.
- Class A shares have higher fees and initial investment requirements, but Class B shares tend to have lower upfront costs.
- Class B shares may convert to Class A shares after a certain period, offering investors the benefits of lower fees and increased voting rights over time.
Class A vs Class B Shares
Class A shares carry more voting rights than Class B shares, are held by insiders or large investors, and are also subject to higher fees and requirements. Class B shares have lower prices, are more commonly held by individual investors, and may have fewer restrictions than Class A shares.
Class A shares are the most commonly purchased shares in the share market as they are the initial public fundings that the company can accept without diluting the company ownership and their control and power over their company.
Almost all companies that put themselves in the share market give out class A shares even if they don’t provide other classes of shares.
Class B shares are not always present in a company as soon as they are part of the share market. This class of shares comes up only after the complete sale of class A shares.
Even after that, the company’s class B shares still require a financial backup in the form of public money from people willing to buy the share in return for periodic profit.
Comparison Table
| Parameters of Comparison | Class A Shares | Class B Shares |
|---|---|---|
| Resale Value | Usually high | Low in general |
| Vote Number | Greater | Lower |
| Present From the Start in the Companies in the Share Market | Yes | Not necessarily |
| Another Name | Common shares | Preferred shares |
| Priority on Dividend | High | Low |
What is Class A Shares?
Class A shares are also called common shares, as they are the first and foremost available shares within a company.
When compared to most other classes of shares that the company might hold, class A has the greatest number of voting rights among the company shareholders.
The number of votes per shareholder for each share that they hold can range from 10 to 100 or even greater.
The number of votes depends on the company too. If the company is well known, has a great profit inflow, and is quite a major company, then the votes can go even higher.
Even after purchasing a class A stock, the shareholder needs to give a mutual fund that is paid over a period of time.
This doesn’t bring any changes in the profit that is given to the class A shareholders.
Such payments can only create an eventual increase in the profit that the shareholder receives periodically.
The shareholders have greater access to vote on board meetings and prove to be quite useful during board member elections.
They can voice their feelings on the company’s running and point out the flaws in business matters.
In case a shareholder wishes to withdraw his/her share from the company, they can do so without much hassle.
There are no resale issues, and since it is a class A share, the value would only increase to double the amount of what the shareholder bought it at.
What is Class B Shares?
Class B shares are more commonly known as preferred stock or preferred shares.
This name comes from a lot more advantages of class B shares, even if the purchase amount might be lower.
Class B share comes with a very small voting power given to its shareholders.
Sometimes the votes might be as low as one voter per shareholder for each of the shares they hold.
This number would not go over the voting power of a class A shareholder.
Due to a low number of voting, a class B shareholder holds very little power in the decision-making of the company.
Their opinions might even go unnoticed if the votes gained on a particular matter are considerably low.
Class B shares are rarely present in a company from the start.
This is because only after class A shares are completely sold would the company think about diluting its power.
If the company in the share market is looking forward to selling more of the company’s rights to the public under class B shares, then the company is in need.
That need might be financial or even in the decision-making process.
The more shareholders, the greater could be the company’s decision-making input from the holders.
It’s not always that a class B shareholder holds the bare minimum voting rights.
Sometimes they may hold votes equal to or greater than that of Class A shareholders.
Class B shareholders need to pay a mutual fund over a period of time to keep their shares intact.
But this shows that they have a lower profit return when compared to other class shareholders with a mutual fund payment.
During a resale of the share, class B shareholders are charged a certain amount to be paid to the company.
Main Differences Between Class A and Class B Shares
- While class A shares have got greater voting right given to their shareholders, class B shareholders hold a very small number of voting rights.
- Class B shares are also called preferred or preferred stock, while class A shares are common shares.
- Class A shareholders gain greater access and an active role in the company’s running, but class B shareholders have a limited say in the company’s decision-making process.
- Class B shareholders need not pay a mutual fund over a period of time, but class A shareholders have to pay a certain amount constantly.
- While class A shareholders can sell their shares without having to pay a fee to the company, class B shareholders have to pay an amount to the company if they wish to sell their shares.
- https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1467-646X.2004.00101.x
- https://www.cambridge.org/core/journals/journal-of-financial-and-quantitative-analysis/article/relative-prices-of-dual-class-shares/BF3549A8D318AE4D07AEF4844C6E58ED
Last Updated : 13 July, 2023
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
Quite an insightful piece, it adds much clarity on the different shares available in the market.
The detailed breakdown of Class A and Class B shares is quite impressive.
Very informative post about the classification of the market shares!
Yes, I feel much more knowledgeable about this now.
This article is fascinating, I had no idea about these differences before.
I agree, it’s quite enlightening.
The comparison table provides a great overview of the distinctions between the shares.
The information provided is comprehensive. Thanks for putting this together.
The post has been very helpful for understanding the finer points of share classification.
I appreciate the clear differences presented between Class A and Class B shares.
Yes, it clarifies a lot of doubts I had before.
Engaging post about share market classifications, very well-written and informative.