Different Share Classes

 Understanding Share Classes

A share class refers to different categories of shares issued by a company, each offering distinct rights and benefits. Investors must understand these classes as they determine their level of ownership, voting power, and influence within a company.

Why Share Classes Matter

Investing in companies provides various opportunities, with mutual funds becoming a popular choice for wealth creation in recent years. Businesses classify their shares into different categories, each granting unique privileges such as shareholder rights, voting power, dividend entitlements, and capital distribution. These classifications align with the company’s strategic objectives and governance structure.

As an investor, the type of share class you purchase directly impacts your rights and returns. This article explores share classes in detail to help investors make informed decisions.

What is a Share Class?

A share class represents a specific type of investment, whether it is common stock in a company or units in a mutual fund. Companies often issue multiple share classes, such as Class A and Class B, each carrying distinct rights and privileges. Similarly, mutual funds offer different share classes with variations in sales charges, expense ratios, and minimum investment requirements.

Investors who purchase company shares receive unique rights based on the class of shares they own. Generally, shares are categorized into Class A, Class B, and Class C, each associated with different fee structures, such as front-end, back-end, deferred, and 12b-1 fees. Understanding these classifications is crucial before investing in common stocks or mutual funds.

Purpose of Share Classification

Companies create different share classes for several reasons, including:

Assigning ownership based on share class.

Retaining control over corporate decisions and board power.

Distributing dividends and revenue based on share class.

Granting or restricting voting rights depending on investor type.

Protecting the company from hostile takeovers.

When a private company transitions to a publicly traded entity, it categorizes and ranks its shares. The share class an investor holds influences their credibility and authority both within and outside the organization. Investors can select a share type based on cost, risk appetite, future goals, expected returns, and other considerations.

Example of Share Class in Action

When a private company sells shares to the public, it offers a percentage of its ownership to investors. For example, if Company X issues 100 shares to investors, selling 30% of its ownership, then owning one share of X would equate to 3.33% ownership. While this is a simplified example, businesses handle large-scale financial transactions involving shares worth millions of rupees.

Types of share classes

There are three ways to raise capital for a company. They can borrow money from family or friends or take a bank loan. These two ways are the most common ones that most companies resort to while raising capital. However, there is a third way, called public borrowing, which is crucial when raising lakhs of rupees. This amount of money can only be raised through public borrowing. Therefore, companies segregate shares into different classes and issue them to the public. These classes include Classes A, B, and C.

Read on to find out more about share classes and their significance.

Here’s a quick glance on types of shares:

Category	Class A	Class B	Class C
Description	Common stock issued during an IPO, significant voting rights, eligible for accredited investors, entitled to vote within the company, may receive a portion of company revenues.	Has fewer voting rights than Class A, fewer benefits, a lower front-end load, and the potential for no back-end load if held for an extended period.	Suitable for short-term investments, front-end load, level load during asset management, 1% back-end load when cashed out, and no voting rights.
Voting Rights	Highest voting rights	Limited voting rights	No voting rights
Load Type	Front-end load may apply	Lower front-end load, potentially no back-end load	Front-end load, level load, 1% back-end load

Benefits of Different Share Classes

Share classes provide distinct advantages for both companies and investors, enabling flexibility in ownership, governance, and financial planning.

1. Tailored Ownership

Share classes define the ownership structure of a company, determining the level of control and influence each investor has. This allows companies to assign rights and privileges based on shareholder groups.

2. Investor Choice

Investors can select a share class that aligns with their financial goals. For example:

Class C shares may be ideal for short-term investors seeking liquidity.

Class A or B shares often suit long-term investors focused on capital appreciation.

3. Asset Distribution in Liquidation

During company liquidation, share classes dictate how assets are distributed among shareholders. Each class has its own priority, ensuring fair allocation based on investment type.

4. Win-Win Strategy

Share classes benefit both companies and investors:

Investors can diversify their portfolios based on risk and return preferences.

Companies can attract capital from different types of investors while retaining control.

5. Clear Governance Structure

By establishing different share classes, companies create an organized hierarchy, ensuring clear governance and decision-making authority.

6. Income Generation

Investors can earn income through dividend payouts, which vary based on the share class they hold.

By offering these benefits, share classes create a structured framework that fosters a balanced and efficient relationship between companies and investors.

Mutual Fund Share Classes (With Example)

Mutual funds offer different share classes, each with distinct fee structures affecting investment performance. While all share classes share the same investment goals and portfolio, they differ in terms of expenses and load fees.

1. Class A Shares (Front-End Load)

Investors pay a fee upfront at the time of purchase.

Fees typically range from 2% to 5.75% of the investment amount.

Although costly initially, they tend to have lower annual fees, making them more cost-effective in the long run.

2. Class B Shares (Back-End Load)

Investors pay a fee when selling their shares (deferred sales charge).

The fee gradually decreases over time and may disappear after holding the shares for a specified period (e.g., 7 years).

Many Class B shares convert into Class A shares after a certain holding period.

3. Class C Shares (Level-Load Fees)

Investors pay an annual fee (typically around 1% of the investment).

Some C shares may have a contingent deferred sales charge if sold within the first year.

While offering higher liquidity, C shares often have higher expense ratios than A shares.

 

Comparison:

A Shares: Suitable for long-term investors willing to pay an upfront fee for lower annual expenses.

B Shares: Ideal for investors who plan to hold shares long enough to benefit from the fee reduction over time.

C Shares: Best for short-term investors seeking flexibility, though they incur higher annual costs.

Company Share Classes (With Example)

Companies often issue multiple share classes to manage ownership and voting rights. These classes are typically structured during an Initial Public Offering (IPO).

 

Example: Google’s Transition to Alphabet Inc.

When Google restructured as Alphabet Inc. in 2015, it introduced multiple share classes:

 

Class A (GOOGL): Available to public investors with standard voting rights.

Class C (GOOG): Also publicly traded but without voting rights.

Class B: Reserved for company insiders and founders, offering significantly more voting power (often 10 votes per share).

This structure allowed existing shareholders (founders and management) to retain control while allowing new investors to buy into the company without influencing corporate decisions.