Class A Shares vs. Class B Shares: An Overview
Common shares represent ownership in a public company. They are usually divided into classes—the most popular being Class A and Class B shares. The difference between the two usually comes down to how the specific company classifies each share. One can have more voting rights than the other, be traded publicly versus non-traded, only available to the founders and executives, or for any other reason.
Key Takeaways
- Companies that offer more than one type of share class usually offer Class A shares and Class B shares.
- The difference between the shares comes down to how a company structures the shares.
- Some companies will restrict one class to those in the c-suite.
- One share class may have more voting rights than the other or may be publicly traded while the other may not be.
Class A Shares
Class A shares are one class of common stock in 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, which are 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. For example, if the chief executive officer (CEO) of a company 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
When more than one class of stock is offered, companies traditionally designate them as Class A and Class B. Both classes are common stock and the difference lies in how the company decides to structure its stock.
A company may offer different classes so that only one class is offered to executives, or that the different classes trade at different prices, or a separate class was offered to a specific division before a merger or acquisition took place.
Additionally, one class may trade publicly while the other may not. The non-traded shares are generally for company founders or executives and come with stipulations on the ability to sell.
As noted, Class B shares are also issued for reasons that don't just 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.
Note
A company can create any number of classes of shares of common stock. The decision is usually made to concentrate voting power within a certain group of people.
Special Considerations
Setting aside the issue of voting rights and other differences, 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. They are a kind of hybrid between a stock and a bond.
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 also 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 evident in the division of share classes issued by Berkshire Hathaway, the company run by legendary investor Warren Buffett. The company's Class B (BRK.B) stock traded at around $435 as of July 2024, while its Class A (BRK.A) stock was valued at over $654,620 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?
Yes, Class B shares have voting rights. 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 as well as how a company has structured their shares. Some shares come with more voting rights while others trade at lower prices. What matters to the investor most will determine which share class is better.
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, it depends on how a company structures each share and what characteristics of the share class matter most to an investor.
