Creating shares and share classes is one of the first things a business owner must do when they create a new corporation and file for the Articles of Incorporation. There are many share classes. .
The business owner must establish at least one share class since their corporation is legally owned by the shareholders. Before you start buying shares of stock in any business, you should understand the differences between the various classes of stock and the rights you have as a shareholder in each class
What is a shareholder?
A common misconception about shareholders is that they own a piece of a company. People think that if a shareholder has 10 percent of a company’s stock, then they own 10 percent of the company. This is not the case. A shareholder who has 10 percent of a company’s stock simply owns 10 percent of the available shares that are offered by the company. A shareholder can be an individual or an institution.
Corporate shareholders have several rights. These rights include:
- Sharing in the company’s profits through dividend distributions
- Benefiting from the financial gains in the company’s stock price appreciation
- Voting to elect members of the board of directors
- Getting first access to newly issued shares to the public
Shareholders also have the right to file a class-action lawsuit against a company if they believe the company has violated any of their rights as shareholders.
Shareholder Categories
Understanding the differences between common shares, preferred shares, and share classes can go a long way in helping you to be a financially successful investor. There are two categories of shareholders. The first category is the common shareholders. The overwhelming majority of people who own stocks are common shareholders. They have all the rights granted to them as shareholders.
The second category is the preferred shareholders. Preferred shareholders are rare and do not have the rights that are granted to common shareholders. Preferred shareholders receive a fixed annual dividend distribution that they receive before common shareholders receive their dividend distribution. The price of preferred stocks tends to be more volatile than common stocks.
Class A, B, C, D, and F Shares
There are several classes of shares. You may have heard about Class A shares or Class B shares, but you may not be certain about what these classes mean. When a company issues shares of stock, these shares are placed in certain categories and given a letter designation. The letter designation indicates the type of rights a shareholder has by owning the stock. Companies can offer any number of classes of stock, but most companies offer two classes. The primary classes of shares in the USA include A, B, C, D, and F.
Class A shares
Individual and institutional shareholders of a company have voting rights that can determine the future direction of the company. This can give outside investors a lot of control of a company, which is why a company will issue Class A shares.
Class A shares are only available to a company’s senior management team, the board of directors, and C-level executives. These shares are not sold to the public and cannot be traded. This prevents swings in the stock price, which can impact the company’s long-term goals and management decisions.
One Class A share can give a shareholder multiple voting rights compared to the other share classes. This makes it easier for the top-level management team to maintain control of the company.
Class A shareholders are the first to receive dividend distributions. If the company is sold, Class A shareholders are paid first once all the debt has been paid off. Class A shareholders can also convert these shares into additional shares after the company is sold. For example, if a senior executive has 1,000 Class A shares at $10 a share, they can convert these into 2,000 shares. Instead of receiving $10,000, they will receive $20,000.
Class B shares
Class B shares are different from Class A shares in three ways. First, Class B shares are available to all investors to purchase and trade. Second, Class B shareholders can have fewer or more voting rights than Class A shareholders. This depends on how a company establishes voting rights for Class A and Class B shareholders in its charter and bylaws. Finally, Class B shareholders have less priority when it comes to dividend distributions. This does not affect the share of profits Class B shareholders receive.
Class C and D Shares
These classes are only used with mutual funds. Mutual funds use classes to describe the fee structure the mutual fund company charges. Mutual fund shares are referred to as units. When you purchase Class C or D mutual fund units, you will pay a certain fee during the year. This fee, which is better known as a load, pays for marketing, servicing, and distribution services. Mutual funds also use Class A and Class B. Mutual fund investors do not have any voting rights.
Class F shares
This class of shares is rarely used and is only given to the founder or founders of a company. Class F shareholders have the most voting rights out of any of the other classes of shareholders.