Class A Shares vs. Class B Shares: An Overview
The difference between Class A shares and Class B shares of a company’s stock usually comes down to the number of voting rights assigned to the shareholder. Class A shareholders generally have more clout.
Despite Class A shareholders almost always having more voting rights, this isn't actually a legal requirement. Class A shares are generally held by those in management positions in the company in order to retain adequate control.
Key Takeaways
- Class A shareholders usually have more voting rights than owners of other classes of stock.
- The difference is relevant only to shareholders who want an active role in the company.
- When more than one class of stock is offered, companies traditionally designate them as Class A and Class B.
- Class A shares can be converted into common stock in the event of a sale.
- Some companies will restrict Class A ownership to those in the c-suite.
Class A Shares
Class A shares are common stocks, as are the vast majority of shares issued by a public company. Common shares are an ownership interest in a company and entitle purchasers to a portion of the profits earned.
Investors in common shares—also known as ordinary shares—are usually given at least one vote for each share they hold. This entitles the owners to vote at annual meetings, where board members are elected, company decisions are made, and shareholders are allowed to voice their concerns. Because of the heightened voting power in Class A shares, many companies choose to only allocate them to those they want in voting positions of power, such as management. It can also retain voting power in the event of a hostile takeover.
Class A shares can also be converted into more than one share of common stock. If for example a CEO owns 10,000 shares that can be converted into 25,000 of common stock, and the company is sold, the CEO then essentially earns a profit off the combined share price of the 25,000 shares.
Class A shares are broken down into different types. There are traditional Class A shares, technology Class A shares, and high-priced Class A shares.
If a company falls into bankruptcy and is forced to liquidate, common stock shareholders are last in line for compensation.
Class B Shares
Theoretically, a company can create any number of classes of shares of common stock. In reality, the decision is usually made in order to concentrate voting power within a certain group of people.
When more than one class of stock is offered, companies traditionally designate them as Class A and Class B, with Class A carrying more voting rights than Class B shares. Class A shares may offer 10 voting rights per stock held, while class B shares offer only one. It depends on how the company decides to structure its stock.
Class B shares are lower in payment priority than Class A shares. That means if a company were to go bankrupt and be forced into liquidation, Class A shareholders would be paid out first, then Class B.
Class B shares can also be issued for reasons that aren't only to benefit the company and executives. For example, a company may have Class A shares that trade for hundreds of thousands of dollars. The company may then issue Class B shares at a much lower price since many investors will not be able to afford a Class A share. This makes investing in the company much more accessible.
Special Considerations
Setting aside the issue of voting rights, different classes of common stock almost always carry the same equity interest in a company. Therefore, shareholders of all classes have the same rights to share in company profits. That is, they have the right to share in any dividends that are approved by the board of directors.
For most investors, voting clout doesn't matter much as long as they believe those with more clout are making the right decisions. It may begin to matter if they feel the company is going off-course and they don't have the votes to help force a change.
Common stock classes should not be confused with a firm's preferred stock. Preferred shares are a different type of asset. In fact, they are a kind of hybrid between a stock and a bond.
Generally, owners of preferred stock are entitled to a dividend, and it must be paid out before any dividends are paid to the owners of common stock. In addition, preferred stock owners have repayment priority over common stockholders in the event of the company's liquidation.
Preferred stocks are far less volatile than common stocks. That fact and the guaranteed dividend make them a popular choice for conservative investors and retirees seeking an income supplement.
Class A Shares vs. Class B Shares Example
The difference between Class A and Class B stock is vividly demonstrated by the classes of stock issued by Berkshire Hathaway, the company run by legendary investor Warren Buffett. The company's Class B stock traded at around $310 as of June 2022, while its Class A stock was valued at over $46,7650 per share.
For many years, Buffett refused to allow a stock split while its price rose into the stratosphere. He preferred to concentrate voting power in the hands of relatively few investors. In 1996, he finally decided to create a Class B to attract small investors.
There's no substantive difference between the two stocks, except that a share of Class B stock has 1/1500th the value of a Class A share and a corresponding fraction of its voting power.
Do Class B Shares Have Voting Rights?
Class B shares have voting rights, but often they are less than Class A shares. The voting power of each class is determined by the company and how much voting power they want to give to those outside management.
Do Class B Shares Count Towards a Company's Market Cap?
Yes. Market capitalization is determined by the sum of all classes of shares.
What Are Class B Shares in a Mutual Fund?
A B-share is a share class that charges a sales load in a mutual fund. This means investors pay a charge when they redeem from the fund. This is different from a front-loaded fund, which requires payment upon purchase.
What Class of Shares Are Considered Best?
Which share class is best depends on the individual and their investing goals. That being said, Class A shares are usually convertible in the event of a sale and offer much greater voting privileges than Class B or Class C shares.
The Bottom Line
Class A and Class B shares differ in their availability, convertibility, and power as it relates to voting. One isn't necessarily better than the other, but Class A shares offer significant benefit in the event of a sale or when an outside force wants to obtain more voting power.
