1. What Are Class A Shares?
2. Why Do Class A Shares Matter?
3. What Are Stock Classes?
4. How Do Class A Shares Work?
5. What Other Benefits Do Class A Shares Have?
6. Does Preferred Stock Have Any Negatives?
7. Does Common Stock Have Any Advantages over Preferred Stock?
8. How Does Pricing Work for Stock Classes?
9. What Are Class D / Class R / Class I Stocks?
10. When Should an Investor Buy from a Class?

What Are Class A Shares?

Class A shares are common or preferred stocks that offer special benefits to owners. Class A shares are the best class of stock. Upper- level management, executives, owners, and founders of the company usually hold this kind of stock. It offers the highest level of voting rights, too.

Why Do Class A Shares Matter?

Classes of stock often have ownership restrictions. They also might have different purposes. For instance, some stock classes are for investment purposes. Some sell at different prices, and some pay different dividends.

Class A shares offer the most benefits. Still, any good company's stock classes shouldn't matter to investors. All the stocks have some value, just not the same benefits. The stock class doesn't affect the average investor's profit share. That's still determined by the company's actual performance.

Most of the time, Class A shares are a simple way to give top executives more power over the business. These shares are also a great way to prevent hostile takeover bids.

What Are Stock Classes?

The first thing to understand is how stock classes work. It's a type or group of stock shares from mutual funds, each of which has the same rights and privileges. No share in a class is better or worse than another. Shares of certain classes are much better than others, though.

The government rarely regulates stock classes. Businesses have the power to decide their own rules via the company charter. The two primary classes of corporate stock are:

  • Common Stock: Investors who own this class of stock earn dividends when the company does well. They lose nothing if the company does poorly. The exception is if the company goes bankrupt. In that situation, a person loses the full investment amount. That's why common stockholders have the most at risk.
  • Preferred Stock: Investors who own preferred stock have much more power within the company. They get voting rights, shareholder benefits, and protections against company bankruptcy. Preferred stockholders enjoy many privileges and little risk. The name tells the story. Preferred stock is better.

How Do Class A Shares Work?

Share classes exist because a company's management team wants to control the direction of the business. Class A shares are a way to do so. While other types of stock such as Class B may come with voting rights, the owners of Class A shares will have more votes per share. They'll keep the power this way.

For example, a Class B stock comes with one vote per share. The management team would write the business charter to give Class A stock five votes per share. That way, the highest level of management would keep up control of the company. Generally, the people who hold Class A shares are C-level executives and members of the board of directors.

What Other Benefits Do Class A Shares Have?

A few other key benefits are:

  • Dividend priority: Picture a line where everyone has their hand out. Each person wants money. Dividend priority means that the people with Class A shares get to move to the front of the line. When a company pays dividends, anyone owning Class A shares gets paid first.
  • Liquidation protection: Should a company fail, a Class A shareholder has investment protection. The first people who get paid when a business collapses are people owed debts. Class A shareholders are second in line. That gives them a better chance of recovering their investment if the business goes bankrupt.
  • Better conversions: In some cases, a Class A share has more value than a regular share. In the example above, a Class A share with five times the voting rights of a lesser share could have five times the value. The company charter spells out the real value of each share class.

A hidden benefit of Class A shares stems from their scarcity. These shares aren't available to the public. They also aren't available in trade.

The idea is that only upper management controls Class A shares. They keep primary voting rights for all major business decisions. This keeps executives from worrying about their own place in the company. Instead, everyone can focus on building a better future for the business. They know that their position is secure due to the static nature of Class A shares.

Does Preferred Stock Have Any Negatives?

No ownership class is perfect. Preferred stock has a few problems, especially for owners of stock other than Class A shares. Potential problems include:

  • Lack of voting rights/power: Even with some voting rights, Class B and Class C shareholders have limited power. The bylaws of most business charters heavily skew toward Class A shareholders. By design, they own control of almost all company votes.
  • Fixed dividends: Most preferred stock has a set return rate for dividends. A shareholder won't make more when the company does better. The only exception is if a corporation offers participating preferred stock instead of normal preferred stock. Fixed dividends limit an investor's growth potential.

Does Common Stock Have Any Advantages over Preferred Stock?

The disadvantages of preferred stock are also the advantages of common stock. While preferred stockholders have little control over a company's direction, common class stockholders get to vote on a lot of issues. Common stockholders may even decide the outcome of corporate elections. This voting right gives them some control over the future direction of the company.

Also, common stockholders have unlimited earning potential. The preferred stockholders receive their money first when the corporation pays dividends. Everything that's left over becomes part of an excess pool of money. Common stockholders divvy up that money. A person with a larger investment in common shares is able to earn a lot more money in these situations than someone with fixed dividends.

How Does Pricing Work for Stock Classes?

A person eligible to buy Class A stock will pay what's known as a front-end charge. This fee isn't an investment. You don't get ownership credit for the cost. Still, Class A ownership has a couple of cost benefits. Shareholders pay a lower fee, the marketing or distribution fee for a fund, known as a 12b-1 fee. Their annual expenses are also cheaper than lower and common classes of stock.

A buyer of Class A shares also has a chance to save money through the breakpoint. This is the purchase amount that gives the buyer a discount on sales charge. A person can qualify if he:

  • Makes a big Class A share purchase
  • Commits to purchase more mutual fund shares on a consistent basis
  • Own other investments from the same mutual fund family

Class B shares don't have the front-end charge. The positive is that every dollar goes directly toward ownership interest. The negative is that shares may come with a possible deferred sales load. Shareholders would pay this fee when they sell the Class B shares.

The exact rules are in the company charter.  Class B shareholders should read them carefully to avoid a surprise when they reduce their investment in Class B shares. There's a reason the deferred sales load fee is also called an exit fee. Its intent is to make shareholders think twice about selling stock.

The cost of the exit fee goes down each year as a reward to loyal investors of Class B shares. Sometimes, a company charter will even turn Class B shares into Class A shares after an extended holding period.

Other costs apply to this share class. Class B shares are likely to have a higher 12b-1 fee. The annual costs are also higher. For these reasons, an investor should always pick Class A shares over Class B shares if there is a choice.

Class C shares are the worst option in terms of cost. They'll have the highest 12b-1 fees. The annual costs are also the most expensive. Class C shares also can't improve into Class B shares or better. They'll always remain the Class C type. That's bad since Class C shares have the highest cost ratio.

This class type also has little if any voting power. Finally, Class C shares are subject to both entrance and exit fees. They are usually lower than Class A and Class shares with similar restraints, though.

What Are Class D / Class R / Class I Stocks?

These are the other three types of stock classes. They are:

  • Class D stocks: Class D stocks let a person invest without paying upfront fees or exit fees. All the money goes toward the stock. People like Class D shares because of their low expense ratios and their lack of 12b-1 fees. These shares would be more popular if they were available to everyone. Unfortunately, only specific retirement plans and brokerage firms can offer them. Everyone with the ability to buy Class D stocks should do so.
  • Class R stocks: Class R stocks also don't have upfront fees, but they do have 12b-1 fees. Since employers usually match these funds in a 401(k), the extra fee isn't a big factor. 
  • Class I stocks: These shares are for investors with a lot of surplus money. Someone willing to make a large investment, possibly $1 million or more, can buy Class I shares. They'll have lower fees similar to pension funds and endowments. These shares are actually the cheapest of all mutual fund options. Plus, companies will convert other share classes into I shares once the investor meets a set criteria.

When Should an Investor Buy from a Class?

Again, Class A shares are always best due to the voting privileges and other advantages. Still, each class has situations where it's a good buy.

  • Class A shares: are best for long-term investors. They'll have lower fees on an annual basis. Also, Class A stock doesn't have entrance or exit fees.
  • Class B shares: are best for medium-term investors. Someone who wants to own a stock for a long time but less than a decade should consider Class B shares. That's especially true with companies whose exit fees decrease over time. Similarly, businesses whose Class B shares can improve to Class A shares are worthwhile investments.
  • Class C shares: are best for short-term investors. Still, it's the type of stock that someone should hold for at least a year. Class C shares are capable of dramatic movement that can benefit the investor. Over time, the cost of owning this stock will increase. That's why it's not a good investment over a longer term.

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