Share class encompasses various categories of shares issued by a business, each endowed with distinct rights and advantages. It's crucial for investors to understand share classes as they directly affect their ownership stake and level of influence within a company.
Investing in companies offers numerous avenues, with mutual funds emerging as a popular choice for wealth accumulation in recent years. It's crucial to understand that companies categorise their shares into different classes, each carrying unique privileges such as shareholder, capital, and voting rights, along with dividend entitlements, tailored to the company's requirements.
As an investor, it's essential to pay attention to the type of share class you're buying, as it dictates your rights within the company. In this article, we'll explore the concepts and types of shared classes in detail.
What is a Share Class?
A share class refers to a specific category of investment, whether it's common stock in a company or units of a mutual fund. Companies often issue multiple classes of stock, such as "Class A" and "Class B," each with its own set of rights and privileges. Similarly, mutual funds offer different share classes, each with varying sales charges, expense ratios, and minimum initial investment requirements. It's essential for investors to understand the distinctions between share classes to make informed investment decisions.
Buyers who invest in company shares are given distinct rights. Three share classes exist: A, B, and C. Each share class has various fees, including front-end, back-end, deferred, and 12b-1 fees. It is important to understand each of the share classes before purchasing common stocks or mutual funds. Currently, companies group shares for several purposes. A few are mentioned below:
- To assign share class-based ownership to investors.
- To control the corporation and retain board decision-making power.
- To distribute dividends and revenue by share class.
- Grant and restrict voting rights depending on investor share classes.
- Save the firm against hostile buyouts.
When a private firm goes public, investors get share classes and the company categorises and ranks these shares. Your credibility and authority within and outside the organisation depend on your share class. This allows investors to pick a share type depending on cost, needs, risk, future objectives, returns, etc.
Finally, a private firm selling shares to the public sells a percentage stake in the company to investors. For instance, company ‘X’ issues 100 shares to investors to sell 30% of its ownership. One X’s share gives you 3.33% ownership. This is a small example, but organisations handle lakhs of rupees through share classes.
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 offer several advantages for both companies and investors:
- Tailored ownership: Share classes define ownership structures. They determine the level of control and influence investors have based on the class they hold. This allows companies to manage rights and privileges for different shareholder groups.
- Investor choice: Investors can pick a share class that aligns with their goals. Some classes, like Class C, might suit short-term investors seeking liquidity. Others, like Class A or B, might cater to long-term investors focused on capital appreciation.
- Distribution of assets: During liquidation, share classes dictate how a company distributes its assets among shareholders. Each class has its own claim on the company's remaining value, promoting fairness based on investment type.
- Win-win strategy: Share classes benefit both sides. Investors can diversify their portfolios, while companies gain access to capital from various investor types.
- Clear structure: Share classes establish a clear internal hierarchy within the company, ensuring organised governance.
- Income generation: For investors, share classes can be a source of income through dividend payouts based on their holdings.
By offering these benefits, share classes create a framework that fosters a healthy relationship between companies and investors.
Mutual funds share class with example
Mutual funds commonly provide investors with various share classes, each with distinct fee structures that impact their performance. Despite sharing the same investment goals and portfolio, these classes differ in their fee arrangements and expense ratios.
The A share class typically involves a front-end load, which is a fee paid upfront at the time of purchase. This fee can range from 2% to 5.75% of the investment amount. Although A shares may seem expensive initially, they might become more cost-effective over the long term.
In contrast, the B share class operates with a back-end load, where investors pay a commission when they sell their shares. This fee gradually decreases the longer the investor holds onto the mutual fund, eventually reaching zero. Additionally, B shares often offer the option to convert into A shares after a specified period, typically around seven years.
The C share class imposes an annual fee, known as a level-load, which typically amounts to about 1% of the investment. However, C shares may also have a contingent deferred sales charge if sold within the first year of purchase.
Both B and C share classes tend to have higher expense ratios compared to A shares, reflecting the annual management and maintenance fees charged by the fund.
Company share class with example
Within the same entity, different share classes often grant varying rights to shareholders. For instance, a public company might offer two classes of common share class: Class A and Class B. This dual-class setup is typically established during the company's initial public offering (IPO). For example, when a private company goes public, it might issue Class A shares to new investors while granting existing stakeholders Class B shares. This structure allows original owners to sell most of their stake while retaining control through Class B shares, which usually carry extra voting rights. An illustration of this is Google's transition to Alphabet Inc. in 2015, where it introduced Class A shares (GOOGL) and Class C shares (GOOG), with only Class A shares having voting rights. Additionally, a Class B share was reserved for management and controlling parties.
Why do companies need multiple share classes?
We have seen what share classes are and their significance. But why do companies need several share classes? Let us understand their differences in detail.
To maintain control over strategic decision-making
Even if their total stake in the firm is reduced, founders and important executives might still have a sizable amount of voting power because of the share classes. This guarantees they can continue to make important decisions and steer the business in line with their goals.
To pay dividends to specific shareholder classes
Companies can provide varying dividend rates by offering different share classes. This implies that dividend payments may differ for different shareholder groups and the flexibility helps to reward certain investors without guaranteeing larger payouts for everyone.
To limit the right to vote
Certain share classes may have little or no voting rights. Companies looking to acquire money without reducing the decision-making authority of current shareholders may find this arrangement advantageous. It guarantees that shareholders can only have a limited impact on business choices.
To prevent adversarial acquisitions
Through the unequal distribution of voting rights across several share classes, organisations may prevent hostile parties from obtaining majority interests. Any company attempting to take over the business without the approval of the major shareholders is discouraged by this structure.
To draw in investments
Diverse share classes meet the demands of various investment segments. For example, while some investors place more value on capital appreciation, others would choose shares with higher dividends. Companies may reach a wider range of investors without sacrificing their ability to acquire funds by providing a variety of share classes.
Institutional share class with Example
Mutual funds offer various share classes beyond A, B, and C, denoted by labels such as I, R, N, X, and Y, often termed as institutional shares. Typically, these classes are reserved for high-net-worth individuals, usually those with assets exceeding Rs. 1 crore, or institutional investors capable of making substantial deposits, often in the seven-figure range.
Interestingly, certain retirement plans like EPF (Employee Provident Fund) qualify as institutional investors. By consolidating employees' contributions, the plan administrator meets the criteria for assessing institutional shares. This is advantageous because institutional shares typically boast the lowest fees and expenses among mutual fund share classes. Consequently, they tend to yield superior returns due to their low expense ratios.
For instance, let's consider an Indian investment company like X Mutual Fund, which offers three share classes. Regular shares require initial deposits ranging from Rs. 5,000 to Rs. 10,000, with an average expense ratio of 1.5%. Direct shares necessitate minimums of Rs. 25,000 to Rs. 50,000, with an average expense ratio of 0.75%. Finally, Institutional shares commence at Rs. 1 crore, featuring an average expense ratio of 0.25%.
How to choose between share classes
When selecting a share class for investment, investors should seek guidance from a financial advisor. It is essential to engage with an investment advisor who maintains impartiality and is not affiliated with any specific fund or biased towards particular investments. Investors should be prepared to articulate and periodically update their financial status, investment objectives, and investment horizon.
Class A and Class B shares are typically suitable for long-term investment and financially capable investors who can tolerate the higher expense ratios associated with these classes. On the other hand, Class C shares are generally suited for short-term investments, making them suitable for novice investors in the investment arena.
The lower expense ratio offered by Class C shares also makes them appealing to small and individual investors. Additional factors to consider include any discounts provided by a share class, whether it is a loaded or no-load fund, the expense ratio that an investor can comfortably manage, and the affordability of the minimum investment amount.
Key highlights
- The term "share class" refers to various categories of shares issued by a company, each possessing distinct rights and advantages.
- Investors need to comprehend share classes as they directly affect their ownership stake and level of influence within a company.
- The three main share classes, namely Class A, Class B, and Class C, each come with distinct characteristics, voting privileges, and fee structures.
Share classes are utilised by corporations to distribute ownership, facilitate decision-making processes, distribute dividends, and safeguard against takeover efforts.
Conclusion
In conclusion, choosing the right share class is essential for optimising your investment strategy and achieving your financial goals. By carefully considering factors such as fees, expenses, minimum investments, and shareholder rights, investors can make informed decisions tailored to their needs. Additionally, seeking guidance from a financial advisor can provide valuable insights into selecting the most suitable share class. Furthermore, accessing a diverse range of mutual funds listed on platforms like Bajaj Finserv Mutual Fund Platform can offer investors a wider array of options to explore and diversify their portfolios effectively. With over 1000 mutual fund schemes available, investors can access various share classes and investment opportunities to build a robust and balanced investment portfolio.
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The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed.
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