Companies issues different types of stocks in the Stock Market to raise their capital. Most new investors get confused with these different types of stocks but it is important to understand what are the various types of stocks company has already issued or planning to issue and what type of stock you are buying.
Common stock is a term that you must have heard before. It is the most typical type of stock companies offer to the public. In fact, companies issues the highest number of stocks in this form. These are the basic shares of a company that any investor can purchase. A Common Stock is a share in the ownership of a company. It represents a claim on the company’s assets and profits. The more stock you hold, the greater is your ownership stake in the company. As the company grows and earns money, the value of your stock increases. On the other hand, if the company suffers loss or goes bankrupt, the value of your stock falls. Common stock holders do not participate in the day to day operations of a business, but they do have the power to elect the board of directors (voting rights).
Some companies have different classes of common stock. The different classes of stock in one company are often called Class A and Class B. The class A, essentially gives the stock owner more votes per share of stock such as ten votes per share compared to the owners of Class B with one vote per share. Although there is no law that specifies the difference between Class A and Class B shares. It is up to the public corporation that issues these shares to assign different rights, such as voting rights, to each category of shareholder. There is also no regulation that specifies the amount of extra votes that a Class A shareholder receives, so the shareholder may receive 5, 10 or 50 votes, depending on the corporation’s charter. When a company has two classes of common stock, investors can select whether they want the right to receive more of the corporation’s earnings/profit, or the right to control the actions of the corporation by having more voting rights.
Many investors avoid stock that has more than one class. Having Class A and Class B shares is an example of differential voting rights (DVR), where all the shares issued by a corporation get equal dividend but have different votes to influence the business decisions. The investor must pay higher price to gain additional voting rights by purchasing the Class A stock, and an investor who is not concerned with managing the company can gain more income by purchasing more of the cheaper Class B shares that provide fewer votes.
Difference Between Class A and Class B Shares
- Class A shares typically have a front-end sales charge therefore a portion of the money you use to purchase these types of shares is not invested on your behalf whereas Class B shares generally do not have a front-end sales charge, so all of your money are immediately invested.
- Class A shares offers more votes per share as compare to Class B (Depends on company charter).
- Class A shares sold at higher price than Class B shares because of the extra voting rights (Depends on company charter).
- When you purchase A shares, you are most likely to incur a front-end sales charge but no sales charge when you sell whereas when you purchase B shares, you are most likely not to incur a front-end sales charge but you may pay a sales charge when selling.
- The maintenance fees for A shares tend to be lower than the maintenance fees of B shares.