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Updated on Monday, March 1, 2021
Companies use a class system to allow certain shareholders more voting rights, with Class A shares being most commonly available to individual investors. In the case of mutual funds, in particular, Class A shares have a unique fee structure, in which investors pay more upfront but then pay lower annual fees than they would with other share classes.
It’s important to understand the different share classes when investing in a particular company or mutual fund — here’s how.
- Understanding Class A stock and mutual fund shares
- Class A vs. Class B shares
- Class A vs. Class C Shares
- Why are there different types of shares?
- Is it best to buy Class A, B or C shares?
- Class A shares: FAQ
Understanding Class A stock and mutual fund shares
Class A stock shares
Most publicly traded companies sell just one type of stock, for which each share equals one shareholder vote. But some corporations use a weighted system — they sell multiple classes of stock, and each class comes with different rights. Known as dual-class shares, this setup is intended to give certain shareholders more control over the company.
Of the companies that use different classes of stock, there’s no standardization across the board. Individual companies can decide what voting rights come with each class — and in the case of most companies that use dual-class shares, Class A shareholders are allowed one vote per share of stock.
Class A mutual fund shares
Class A shares also apply when it comes to mutual funds, but in a very different way. While the different stock classes come with different rights, different shares of mutual funds come with different fee structures.
Class A mutual fund shares typically come with the highest upfront cost. Investors will pay a front-end sales charge, meaning not all of their money is invested. These sales charges typically equal between 2% and 5%. For example, let’s say you buy $500 worth of Class A mutual fund shares. If the fund has a front-end sales charge (also known as a front-end load) of 5%, you would pay $25. So rather than buying $500 worth of mutual fund shares, you’re actually buying $475 worth.
Investors who buy Class A shares also usually pay an ongoing fee of about 0.25% of their assets each year. The fee for Class A shares is typically lower than that for Class B and C shares.
Class A vs. Class B shares
Class A vs. Class B stock shares
Most companies that use different stock classes have two options: Class A and Class B stock. Class A shares typically come with one shareholder vote per share. Companies generally award more voting rights to individuals who hold Class B shares.
These shares are often reserved for important stakeholders within the company, such as founders or executives. Many companies offer Class B stockholders 10 votes per share.
However, it’s important to note that this is not universal. While most companies offer Class A shareholders one vote and Class B shareholders more, there are companies that classify their shares differently.
Class A vs. Class B mutual fund shares
Unlike Class A mutual fund shares, Class B shares don’t usually come with a front-end sales charge. Instead, investors may pay a contingent deferred sales charge, also known as a back-end load.
The amount you pay for this sales charge depends on how long you hold your fund shares. The longer you hold them, the lower your sales charge will be — it typically decreases by 1% each year. Eventually, the sales charge will be eliminated altogether.
Class B shares typically come with a higher annual fee than Class A shares, and investors can expect to pay about 1%. But two years after the sales charge is eliminated, Class B shares are converted to Class A shares, meaning you’ll eventually pay the lower annual fee.
Class A vs. Class C Shares
Class A vs. Class C stock shares
Class C stock shares are the least common. Most companies with dual-class shares have just two different classes. However, there are a handful of firms that sell this class of stock, and these shares most often come with no voting rights.
Class A vs. Class C mutual fund shares
Similar to Class B shares, investors don’t pay an upfront sales charge when they purchase Class C shares. Instead, their entire investment goes toward buying shares. Investors might pay a small fee when they sell their shares, but it usually only equals about 1% and only applies if you sell your shares within a short time (one year, generally).
Like Class B shares, Class C shares charge a higher annual fee of about 1%. But an important distinction with Class C shares is that they never convert into Class A shares. As a result, investors pay the higher annual fee for as long as they hold the shares.
Why are there different types of shares?
Allow for different forms of voting rights
Selling different classes of stocks allows companies to give certain individuals more control and voting power. When companies use multiple stock classes, the shares with the most voting rights are generally reserved for leaders within the company. Other shares come with fewer voting rights — and sometimes none at all — but those shareholders can still benefit financially from the company’s growth through capital gains and dividends.
Having different forms of voting rights is the most common reason for different stock classes, according to Asher Rogovy, chief investment officer at advisory firm Magnifina.
He gave this example: “Alphabet [Google’s parent company] issues class A, B and C shares. Class A shares have dividend rights, one vote and trade publicly under the symbol GOOGL. Class C shares have dividend rights, no votes and trade publicly as GOOG. Class B shares have 10 votes and are privately held. The purpose of these class B shares is to concentrate legal control of the company to a small number of people.”
Offer different investing options
Mutual funds often have multiple share classes to help individuals invest in a way that best meets their goals. There are different investing styles — some people buy and hold assets for many years, while others trade more regularly.
By offering multiple shares, mutual funds give investors the flexibility to choose a fee structure that benefits them most.
Is it best to buy Class A, B or C shares?
If you’re investing in stocks… Because there’s no standardization across companies that use multiple stock shares, it’s important to research individual firms in which you’re considering investing. The classes can be structured very differently from one firm to the next. For example, one company might offer Class B shareholders 10 votes per share, while another might offer Class B shareholders no votes at all.
As you research each company, it’s important to consider what your priorities are when you buy stock. Many investors might simply want to grow wealth through capital gains and dividends, and they aren’t particularly concerned with voting rights. In that case, you may not mind buying stock that doesn’t come with voting rights.
On the other hand, you might want to exercise your voting rights — or simply stand by the principle that each share should equal one vote. In that case, you may prefer to avoid investing in companies with dual-class shares.
If you’re investing in mutual funds… The biggest difference between the different mutual fund shares comes down to the type of fees you pay and how much they are.
Class A shares require a larger upfront fee, but a significantly lower annual fee. As a result, they might be better suited to longer-term investors. On the other hand, Class C shares come with no upfront cost but have a higher annual fee. As a result, you might actually end up paying more in the long run than you would for Class A shares.
“There is a breakeven calculation that should be solved and is dependent on the investment amount, time horizon and fee schedule,” said Zachary Bachner, a CFP at the financial planning firm Summit Financial. “Every individual’s situation is different, so it is best to consult with a professional regarding their personal situation before deciding the best route to take. Primarily, the biggest deciding factor for which share class to use is the time horizon of the investment.”
Class A shares: FAQ
Both corporations and mutual funds will sometimes offer different share classes. In the case of corporate stocks, each share class comes with different voting rights, allowing companies to give certain shareholders more power. Mutual fund share classes each come with different fee structures.
There’s no standardization when it comes to classifying shares — it’s up to each individual company. For example, Google’s parent company Alphabet offers Class B shareholders 10 votes per share. But if you bought Class B stock from CBS Corporation, you’d get no voting rights at all.
Preferred stock is a type of stock many companies offer. Preferred stockholders are granted preference when it comes to dividends — they often receive regular dividend payments and receive their distribution earlier if the company liquidates.
The other key type of stock is common stock. In a liquidation event, common stockholders receive whatever assets remain after preferred stockholders and other parties, including creditors and bondholders, get their share. Common stock comes with voting rights, while preferred stock usually doesn’t.
Common stockholders also benefit from growth of a company’s stock price, while preferred shareholders’ growth is capped at the dividend payout rate. This means preferred shareholders may experience less volatility with their investment — their shares aren’t vulnerable to stock market fluctuations — but they also may experience lower growth.
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