What is a share class?

A share class is a designation assigned to a particular form of security, like a mutual fund unit or common stock.

Firms with multiple classes of common stock often identify each class with alphabetic markers, like "Class A" and "Class B" shares, which have various privileges and rights. In addition, mutual funds have many share classes with different sales costs, minimum initial investment requirements, and expense ratios.

Simply put, the dividing of shares into multiple classes is referred to as the share class. The purpose is to give various types of shareholders various rights such as voting rights, capital and dividend rights, profit entitlement, different purposes and features based on the shareholders' needs, etc.

Furthermore, a firm's articles of association, also termed articles of incorporation, will specify and guide the types of shares and share classes it can issue. Thus, the firm divides its stocks into classes, each with its own set of restrictions and privileges and its own set of rights. 

Frequently Asked Questions (FAQs)

What are the various types of share classes?

Share types

Preferred and common shares are the most prevalent types of shares from which share classes are formed. 

Commonly split shares are considered ordinary shares. It's divided into multiple share classes, each with its own set of privileges, rights, and restrictions on dividends and voting. Based on the company's conditions, the shares could be classified as Class A, Class B, Class C, and so on.

Preference shares are those that pay a set rate dividend but don't have voting rights. They may be redeemable, non-redeemable, cumulative, or non-cumulative, and in terms of dividend payments, they usually come before ordinary shares.

Various classes of share

From the split of ordinary shares, public firms may issue a variety of share classes. The classifications differ from one firm to the next and from one fund to the next.

The following are the most common classes:

Class A Shares

When a public firm floats its stock via an IPO, it may issue Class A shares to new investors. In most cases, each Class A share comes with one vote. Holders of Class A shares are also eligible for a dividend and a share of the firm's capital if the firm goes into liquidation. As a result, they might enjoy lesser benefits than Class B in dividends, voting rights, and liquidation.

Class B Shares

Class B shares are formed by combining preferred, and common stock, and these shares typically have higher voting rights, income entitlements, and capital rights. Class B shares can get up to 10 votes per share and are often reserved for early investors and founding members.

Class C Shares

Class C shares, however, do not usually come with voting rights. Armour (UA.C), Alphabet (GOOG), and CommerceHub (CHUBK) are instances of firms that have Class C shares on their share register. Match Group (1/100) and Coca-Cola Company (1/20) are two examples of Class C shares with limited voting rights.

Class D Shares

Shares in Class D mutual funds are recognised as no-load funds. Therefore, they are not included in the charges for back-end, front-end, or level load. In comparison to other share classes, they also have the lowest expenditure ratio. Discount brokers are often the only way to buy Class D shares, and each transaction comes with a fee that must be paid to the broker. 

Class I Shares

Class I shares are typically regarded as institutional shares made available to shareholders, institutional investors, and high-net-worth individuals. Therefore, they have a more significant minimum investment requirement of $25,000 or more. In addition, other investors will have the option of pooling their funds through 401(k) plans and investing in mutual fund Class I shares.

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What is the reason behind the development of multiple share classes?

Firms develop distinct share classes for a variety of reasons, including: 

• To entice investors.
• To safeguard against a hostile bid.
• To maintain firm control and strategic decision-making.
• To encourage and retain staff.
• To give a powerful group of shareholders vote rights while limiting voting to a distinct class of shareholders.
• Dividend income should be directed to specific shareholders, and income distribution methods should be determined.

How to select share classes?

When selecting a class of stock to invest in, investors must consult with a financial expert. It's also vital to find an investment advisor that isn't affiliated with or biased in favour of any certain fund. Investors must be able to define and update their financial position, investment objectives, and investment horizon.

Long-term investors and financially capable investors who can afford the high expense ratios will profit from Class A and Class B shares. However, class C shares are generally used for short-term investments, making them ideal for new investors.

Furthermore, Class C shares are suitable for individual and small investors because of their low expense ratio. 

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What are the advantages of various share classes?

Raising capital for a start-up firm by releasing non-voting shares guarantees that founding members do not lose control and that other shareholders do not engage in a profit-sharing plan.

Allocating a share class with a strong voting power implies that the promoters and founder members control management.

Firms can also restrict the number of dividends paid to each investor by distributing particular share classes.

Protection of the firm in the event of a liquidation, in which some share classes will get a return on their investment while others will be denied or restricted. Assuring that certain shareholders get dividends before other share classes do.