Definition
The terms Class A and Class B stock refer to common or preferred shares issued by the same corporation that offer their holders different rights. For example, each class of stock might differ with respect to the shareholders' voting rights or the payment of dividends.
Explanation
Typically, the charter of a company will outline the types of common stock it may issue. One common misconception is Class B stock is always subordinate to Class A; this is not always true. Companies will oftentimes offer different classes of stock to protect the voting rights of certain shareholders.
For example, a family owned business that is now a publicly traded company might offer two classes of stock. The original owners might retain Class B stock, providing them with ten votes for each share held, while Class A stock is issued to the public and provides one vote per share. This arrangement allows the original owners to retain significant voting rights while holding fewer shares. In well-run companies, voting rights should not be a concern for shareholders.
Companies can also use different classes of stock to differentiate or prioritize the payment of dividends. For example, Class A stock might be paid dividends before payment is made to holders of Class B stock. Similarly, one class of stock might be paid at a higher dividend rate than another.
Investors can quickly distinguish between classes of stock by looking at the ticker symbol. Berkshire Hathaway Class A will have the symbol BRK.A, while the symbol for its Class B stock is BRK.B.
Related Terms
The term business organization refers to the form of entity used by a company to conduct business. Sole proprietorships, partnerships, and corporations are the three forms of a business organization.
Moneyzine EditorJanuary 9th, 2024
The term articles of incorporation refer to documents submitted by a business entity to a government agency to legally register the creation of a corporation. The articles of incorporation are typically submitted to the Secretary of State or Department of the Treasury using a form that is unique to each state.Moneyzine EditorSeptember 18th, 2023- The financial accounting term preferred stock refers to a class of equities issued by corporations that contains special preferences, or features, that are not present in common stock. Preferred stock dividends are typically paid before those of common stocks; however, they usually don't have the voting rights common shareholders enjoy.Moneyzine EditorSeptember 21st, 2023
The term capital stock is used to describe the authorized and issued transferable units of ownership in a corporation. Capital stock can include both common as well as preferred securities. The value of all capital stock issued can be found on the company's balance sheet.Moneyzine EditorJanuary 10th, 2024
