Class B Shares: Everything You Need to Know
Class B shares are common stocks or preferred stocks offering fewer advantages than Class A.10 min read
What are Class B Shares?
Class B shares are:
- Common stocks
- Preferred stocks offering fewer advantages than Class A
Mutual funds can be divided into more than one type, and each type reveals the interest, portfolio, fees, and costs, in addition to the commission the sales representative of those stocks will receive in turn. Generally, class B shares are a kind of stock that offers a variable amount of voting shares when compared to class A.
What is the Difference Between Common and Preferred Stock?
Preferred stock is a type of security that gives people priority dividend amounts. This helps the owner's priority dividend payments and boosts the company in cases of liquidation or bankruptcy.
On the other hand, common stock is mostly lower-priority but found much more often in equity transfers. Companies sometimes create various classes of common stocks for investors, members of boards, or founders.
When companies want two share classes, they often go with class A and class B.
What is the Difference Between Class A and Class B Shares?
When you buy stocks with a broker, you can select which ones you prefer. Some differences between the choices include:
- How much it costs, and
- How much profit the broker makes
Often, people think that Class A offers more voting shares, but it's not always true. Companies cover up the cons of share ownership (less voting possibilities) by naming them class A or class B, rather than describing them for what they are. To get a better sense of what is what, read the company's charter.
Sometimes, companies play around with the titles of shares, so as not to show candidly their distinctions. Sometimes, even if one class has more votes, it offers fewer dividends. Unfortunately for the investor, there are no standardized rules. Therefore, the investor must thoroughly research all the pros and cons on his own.
The standard thinking is that voter shares and dividends are different between the two types. If you buy some shares of stock in a company, a single class B share might give you two votes. However, if you buy class A shares, you could receive six times as many votes for each single share. So, class B shares could be less dividend-focused, theoretically speaking. One sign that the situation may not pan out is when a B stock investment is great than $100,000.
It's true that very often, the purchase of B stocks don't necessitate paying more fees. With that said, expenses add up over four to eight years. There is also a tendency to have what is a called a "contingent deferred sales charge" (CDSC), which you may be required to pay if you sell out before the end of a six-year period. There are other benefits you may lose out on, as well—such as breakpoint discounts which would otherwise be available on stock A bulk purchases.
Read on to understand whether stock A or stock B is the most beneficial match for you. Be sure to protect yourself, and make sure that the stocks you choose are truly good for you. Make sure that the broker is not motivated simply by the commission.
To understand how the differences can affect you, consider:
- How much time you want to keep the stock
- How big the investment is
- If sales charge discounts are applicable
To find out more about a specific group of mutual funds, see the fund prospectus. In the meantime, gain a general understanding of the distinctions between A, B, and C shares.
Why Purchase Class A Shares?
Class A shares often have:
- A front-end sales charge, also called a "load," taken from your original investment
- "Breakpoints," which are discounts off the front-end sales charge. This assumes one or more of the following is the case: 1) You make a significant financial investment. 2) You have other funds within the same family. 3) You opt to regularly purchase shares. 4) You have family or other people to link with who also have funds in this family.
- There is often a management fee charge. These are the same for all the shares of any one fund, but they do fluctuate across fund types.
- There may be 12b-1 fees. On class A shares, these are lower than those of B and C shares. Due to this, the complete operating expenses on class A shares are often lower as well.
Class A shares are a good option to invest in. There is a commission to pay, but the buyer could be eligible for discounts on these, as well as receiving lower 12b-1 and marketing and distribution fees.
What are the Different Kinds of Breakpoints?
There are a few different kinds, and as your investments grow, you reach thresholds where there is a lower amount of sales load. Breakpoints and their savings are worth looking into.
Sample Breakpoint Schedule for Class A Shares
- For an investment amount of under $25,000, the sales load is 5.75 percent.
- Between $25,000 and $50,000, it is 5.50 percent.
- Between $50,000 and $100,000, it is 4.50 percent.
- Between $100,000 and $250,000, it is 3.50 percent.
- Between $250,000 and under $500,000, it is 2.75 percent.
- Between $500,000 and $1 million, it is 2.0 percent.
- For $1 million or more dollars, it is 0.0%.
What are 12b-1 Fees?
These are named after the Securities and Exchange Commission (SEC) rule. They are costs that aren't paid directly but are subtracted from the fund's total yearly assets. They cover the cost of marketing and distributing the funds to investors. The fees may also be used to compensate a broker, much like sales charges.
Why Purchase Class B Shares?
- They don't have a front-end sales charge taken off of the first investment. This means that all the money you put in is active in the fund. Class A shares, however, have a sales load deduction up front.
- They often have a "Contingent Deferred Sales Charge" (CDSC) which you pay out if you sell within a set number of years. It becomes smaller each year and eventually disappears altogether, usually after six years. This means that selling B shares within the typical six-year period, when such charges exist, could lower the profit from your original investment capital.
- Since there is no load cost, the purchase price goes into the fund itself. Therefore, class B shares can have a good 12b-1 rate as well as good yearly management fees.
Often, class B shares transfer into class A shares automatically, after either six or eight years. When this happens, you are charged the annual fund fees given to class A shares. It is lower than that for B shares. However, the exact pricing and transfer qualities are different across funds, so be sure to check. Generally speaking, a briefer conversion period is more beneficial.
There are some instances where holding B shares for a long time could be of added benefit. However, they have a 12b-1 fee that could be higher than those in Class A. This would apply when you pay less than you did for an up-front sales load on A shares. To figure out what's best, try to find some analysis software.
There are no load fees for class B shares. The fee can be eliminated if the buyer holds them for five or more years. Plus, class B can convert to class A if you keep them for a long time.
A sample CDSC Schedule for Class B Shares Would Look Like:
- Zero to one years since purchase, a 5 percent contingent deferred sales charge (CDSC)
- For one to two years since purchase, a 4 percent charge
- For two to three years since purchase, a 3 percent charge
- For four to five years since purchase, a 2 percent charge
- For five to six years since purchase, a 1 percent charge
- For over six years since purchase, no charge remains.
If you do opt for B shares, follow their scheduled conversion time. This is especially relevant if the shares are in an account that transferred from one firm to another. To find the details on conversion, look at the prospectus or check with your broker.
Why Purchase Class C Shares?
Class C Shares:
- Don't have a front-end sales fee, which means your money is fully invested from the start
- Have a lower CDSC than class B shares, such as 1 percent, and often for a briefer period, like a year
- Are likely to have higher annual operating costs than class A shares, often because of their increased 12b-1 fees
- Generally don't change into class A shares, but continue to charge higher annual expenses, such as 12b-1 fees, for the time the shares are maintained
- Could be less pricey than other classes, if you plan to invest for a shorter span of time—this is because your sales charge will be zero or else very minor.
- Could cost you less, due to their higher annual expenses—if you keep them for a long time
What Are No Load Mutual Funds?
Yearly costs of no-load funds are lower than regular load funds. Some funds charge sales loads, but others do not. No-load funds don't request an upfront charge nor a later charge such as a CDSC. With that having been said, NASD rules do ask that 12b-1 costs don't get higher than .25 percent of the fund's average yearly net assets. This is part of the working definition of a no-load fund.
No load funds can bought from a mutual fund company or brokerage firm supermarket. However, the downside is that you'll be missing the guidance of a professional.
If you wish to buy via a professional, it's recommended to seek an advisor—but you need to pay a year cost for the support. Naturally, this indicates an additional ongoing rate beyond the regular cost of the fund.
What are Missing Breakpoints?
If you make a $50,000 to $100,000 purchase of B or C stocks, you may not receive the strong breakpoint discounts you may otherwise receive on stock A shares.
Therefore, the unfairness of inappropriate sales of class B and C sales have been scrutinized. Be cautious that the stocks you are purchasing are truly the correct types for your situation, and ask about buying stock A shares.
Front-end loads: When it comes to front-end loads, class A stocks have a primary sales charge, though this can be lowered or reduced with breakpoint discounts. Class B stocks don't have them, and Class C usually doesn't, either.
Contingent Deferred Sales Charges: When it comes to Contingent Deferred Sales Charges (CDSC), class A often has none, class B will lower over the years, and class C has a lower CDSC than Class B, which also goes down after the first year.
12b-1 fees: As for 12b-1 fees, class A usually offers a lower amount than B and C. Classes B and C often have larger fees than those of class A.
Conversion Processes: Regarding conversion processes, Class A doesn't transfer. Class B changes into Class A after years, which means that costs decline. Class C stocks usually don't convert, with yearly costs staying at the C level.
What is Super Voting?
Super Voting multiples are 10 or more votes per higher class share. Sometimes, they are even higher than that amount. The goal is usually to give insiders more control over corporate choices.
Despite voting rights, share classes often have similar rights to profit and ownership. Retail investors may have specific purchasing powers but usually claim equal benefits when it comes to general profits. They receive good returns on a company's equity.
The only time the distinction between class A and B is a big problem is when the voting rights are so unbalanced that lower management speaks up instead of the shareholders.
Why Are Class B Shares Relevant?
If a company is doing well and managed successfully, the difference between the two shares has some impact.
However, there are some cases when the difference is relevant.
Sometimes when companies become public, they begin a new kind of stock available to executives only. This gives more power to a specific group of people (with super voting rights) and defends against unwanted acquisitions. However, the differences here also don't affect the investor's profit share or other benefits.
Increasing voting shares is a key strategy which establishes greater or lesser control. People may have more voting rights despite having fewer shares and can make decisions about corporate authority and ownership. If the corporation is managed well, you don't need to worry too much about your investments.
What To Do Before You Invest
- First, do research. Check a fund's prospectus or statement of added information—and do it before you buy. Look into the various fund types and their associated fees. For a more significant investment, try to comprehend how breakpoints work and if they can help you in your situation. Never decide too quickly and take your time to think through your options.
- Make use of a fund analyzer software to decide which type of fund would be most beneficial. This helps you compare the pros and cons of the various types and classes, revealing the different sales loads and expenses which are all quite different. Remember that even seemingly minor differences make a large impact down the road.
- Think about the amount of time you want to keep the investment and determine the fund's sales load and the expenses per share class.
- Mutual funds from one company are different from those of others. In other words, while class A might be good for you from one company, another class from a different company can supersede that in terms of benefits.
- Ask questions about which options are best given the amount and time period. Ask them to write down why they think one type is better than another. Also, ask them which breakpoint deals are offered if you opted for class A instead of B or C? Finally, ask them what they will be paid themselves—over the length of time—if they sold to you?
- Review your contract carefully. If you sign a written agreement that what you have purchased is your choice, be sure to read everything carefully. Ask to take the contract home to think over and discuss with other people. If you already made a purchase you think was unjust, file a complaint at Finra's Investor Complaint Center.
Ready to Purchase?
Investing in shares in a company is a challenging experience. It's advisable to seek counsel before starting a new investment.
UpCounsel lawyers are knowledgeable about investments, and they are here to help you.
You can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top five percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard and Yale and average 14 years of legal experience, including work with or for companies like Google, Menlo Ventures, and Airbnb.