What Is Class A Stock (Explained: All You Need To Know)

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What is a Class A Stock?

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Let me explain to you what Class A stock is and how it works!

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What Is Class A Stock

Class A stock refers to a type of classification that some companies will choose when issuing shares where they vary the shareholder rights associated with the class of stock.

For instance, many companies issue Class A stock to have more voting rights than Class B stocks.

As a result, the company defines different voting rights for different classes of stock issued to shareholders.

Generally, Class A stock bears more voting rights than Class B stock, but this is not a legal requirement.

Companies are free to define the rights associated with each class of stock they issue.

When companies issue different classes of stock, the company will need to provide for the different classes in its charter and bylaws.

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Why Issue Class A Stock

There are many reasons why a company may choose to issue Class A stocks.

One common reason why Class A stocks are issued is to provide company founders, executives, or senior managers more voting rights per share.

For instance, the Class A stock can carry 10 voting rights per share whereas Class B stocks can have 1 voting right per share.

In this case, the company founders or executives can own fewer shares but still have a controlling interest in the company.

Another reason why Class A stock is issued is to provide different benefits to the shareholder such as certain rights to receive dividends or priority in liquidation payments.

For example, the company may choose to provide Class A stockholders priority in receiving dividends.

As a result, the Class A stockholders will receive dividends before any Class B stockholder can receive a payment.

Other reasons for issuing Class A shares is to provide the stockholder the right to convert them into common shares or receive liquidation payment in priority in case the company is wound up. 

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Types of Class A Stock 

There are different types of Class A stocks that companies can issue, such as traditional Class A stocks, technology Class A stocks, or high-priced Class A stocks.

The traditional Class A stock refers to the type of security that the company has assigned certain rights and privileges.

For example, the most common traditional Class A stock will carry more voting rights per share than other classes of stocks issued by the company.

Then you have technology Class A stocks that are issued to the general public and can be traded on the secondary market.

Highly famous technology companies may use this type of share classification where the Class A stocks carry one voting right per share and are traded on the market, Class B stocks carry more voting rights per share but are not traded on the market and are owned by insiders, and Class C stocks where it is traded on the market and have no voting rights.

A good example of this type of stock structure in technology companies is Google.

Then you have the high-priced Class A shares where companies deliberately keep the stock price very high to attract a specific type of investors.

Typically, high-priced Class A shares are highly expensive and have more voting rights per share and then you have Class B shares that sell for a more affordable price but will only have one voting right per share.

Berkshire Hathaway is a company that uses this type of stock structure.

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Pros And Cons of Class A Stocks

There are different advantages and disadvantages to issuing Class A stocks.

Here are the main benefits of issuing Class A shares:

• The company can grant specific benefits to the stockholder
• A stockholder can receive dividends in priority over other classes of stocks
• The stockholder will be paid in priority before other stockholders in case the company is liquidated 
• The company can grant more voting rights to the stockholder

On the other hand, here are the main drawbacks of issuing Class A stocks:

• Not all classes of stock will trade on the open market and be accessible to the public
• The shareholders that own such classes of stocks cannot easily sell them
• Only specific investors will own a specific class of stock

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Class A Stock vs Class B Stock

A company can choose to issue different classes of stocks, such as Class A and Class B stocks.

However, what is the difference?

Generally, both Class A and Class B stocks provide the same rights to the stockholders.

The main difference between the two is the voting rights (in most cases).

Very often, companies will issue one class of stock to carry more voting rights than the other.

For example, Class A stocks can be designed to have 10 voting rights per share whereas Class B stocks have 1 voting right per share.

In this case, company founders, executives, and management can own Class A stocks allowing them to own fewer shares but still maintain a controlling interest in the organization.

Keep in mind that companies can choose to allocate or strip away rights for the different classes of stock as they feel appropriate.

For instance, Class A and Class B can be issued to give one class the right to convert the stocks into common shares, or give dividend priority, liquidation payment priority, or other rights.

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Class A Stock Example

The most compelling example I can use to demonstrate what Class A stocks are is to look at Warren Buffet’s company Berkshire Hathaway.

In fact, Berkshire Hathaway has two classes of shares traded on the stock exchange: Class A and Class B.

Class A stock trades at a much higher price and grants the holder 10 votes per share.

On the other hand, the Class B shares are more affordable but grant 1 vote per share to its holder.

Warren Buffet intentionally maintains the Class A stock price very high and refuses to allow for any stock split to attract a very specific type of investor.

As you can see, Berkshire Hathaway uses the different classes of stock to assign different voting rights to the stockholder.

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Takeaways 

So there you have it folks!

What are Class A shares?

In a nutshell, Class A shares represent a specific class of securities issued by a company as authorized by its charter and bylaws.

Traditionally, Class A shares will carry more voting rights per share than other classes of stock.

For instance, Class A shares will provide the shareholder 10 votes per share whereas Class B can provide 1 vote per share.

However, companies can assign the rights and privileges as they deem appropriate to different classes of stock, including Class A shares.

Class A shares are typically issued to company founders, managers, executives, and board members allowing them to maintain a controlling interest in the company while issuing other classes of shares to raise capital.

Now that you know what Class A stocks are all about and how they work, good luck with your research!

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