The short version
- Classes of shares determine the right of the stock owner.
- Most shares on the stock market are known as common stock, which are regular shares that include general voting rights.
- Preferred shares don't have voting rights, but shareholders usually receive a higher dividend and have better protection in the event the company goes bankrupt.
What is a class of shares?
In investing, a class of shares designates the rights of a stock's owner. Some companies may have just one class of shares. Other companies opt for a more complex model with multiple share classes.
Types of shares
Most stock floating around on the stock market is common stock. Common shares, or ordinary shares, are regular shares. Owners of these shares can vote on certain company policies and could get a slice of profits through dividends. As a stock market investor, you're most likely buying common stock. These voting shares also have more of a say in the company. But owning a few common shares doesn't mean you have a large say. The voting rights of stockholders vary by the different classes and the different rights of shareholders, which is usually outlined by the company.
Preferred shares usually don't have voting rights at all. Instead, preferred shareholders may earn a high dividend payment that is prioritized over common stock dividends. In a bankruptcy, preferred shareholders have more protections than common stock owners. In many ways, a preferred share works more like a perpetual bond than a share of stock.
The different share classes
In addition to common vs. preferred stock, you may come across shares listed as Class A shares or Class B shares. When you see Class A and Class B shares of a stock, you should be on the lookout for differences in voting rights. As with Facebook, one class may have more voting power than another. And this makes it a better investment choice in some cases.
Why are there so many different types of shares?
There are many reasons a company may want to create different types of share classes. Having various share classes can help the company maintain control by retaining voting rights on key strategic decisions.
Class of shares examples
While it's interesting to read about stock market class of shares, it's more fun to see different share classes in action. Here are three examples from public companies traded in the U.S. stock market today.
Berkshire Hathaway, a conglomerate built by legendary investor Warren Buffett, split the company's ownership structure between highly valued Class A shares and lower-cost Class B shares.
Alphabet, the parent company of Google, runs with four share classes. Class A shares have one vote per share and Class B shares get 10 votes per share. Class C shareholders get no voting rights. Alphabet also issued shares of preferred stock.
Love him or hate him, Peter Thiel is a shrewd businessman. The PayPal cofounder went on to found secretive technology company Palantir. This company has a complex stock structure. It uses Class A shares with one vote each, Class B shares with 10 votes each, and Class F shares with no more than 49.999999% of the voting power.
How to decide which share class to invest in
To decide which shares are best to invest in, conduct a fundamental analysis, which you can find out how to do in our technical vs. fundamental analysis guide. This helps you find an estimated value per share to determine whether a stock is undervalued or overvalued.
Shares of stock are an essential investment, but not all shares are created equal. Before clicking the buy button, take the time to understand exactly what you're buying and the rights you have as a shareholder. When you do, you should be on a better path for investment success.