You’ve nailed the basic investing terms, you know your ETFs from your P/E ratios, you’ve researched companies and you’re ready to invest when suddenly you’re faced with yet another fork in the road. Why are there two types of shares for the same company?! Am I supposed to choose Class A or Class B, and what’s the difference?
For most of these companies the immediately obvious difference is the price, but this isn't the only thing separating the peanuts from the pistachios. Let’s look at the difference between Class A and Class B shares, and dig further into the pros and cons of what dual-class companies mean for investors.
If you want to be top of the class when it comes to investing lingo, you’ll need to learn your A-B’s. Berkshire Hathaway’s stock structure of having Class A and Class B shares is just one example of the many dual-class companies available on the share markets. In fact, companies with multiple share classes make up about 7% of stocks listed on the US markets.
A company can create two classes of shares to allow different voting rights among shareholders, or in the case of Berkshire Hathaway, creating a B Class (Baby Berkshire) was aimed at attracting smaller investors. At around US$490,000 at the time of writing this article, a single Berkshire Hathaway Class A share could buy you the average Kiwi house, mortgage free! Compared to buying a Class B share at around US$320, which is less likely to need your entire life savings, having a second more affordable class of shares is a pro for smaller investors.
Google’s parent company Alphabet is true to its name, with A, B and C classes of shares. Let’s look at the differences between each;
- These shares trade on the Nasdaq under the ticker symbol GOOGL. Anyone who holds these shares has one vote per share.
- These shares don't trade on a public exchange. They are owned by Google insiders and early investors and entitle them to 10 votes per Class B share, making them super-voting shares.
- This stock trades on the Nasdaq under the ticker symbol GOOG, these Class C shareholders have no voting rights.
Voting rights on different classes of shares
Google’s example above shows that one of the key differences between different classes of shares is voting rights. Depending on who you ask, the difference in voting rights can be seen as a pro and a (somewhat controversial) con. Greater voting rights on certain share classes give those shareholders tighter control, and make sure key decision making is firmly in the hands of a select few.
For Berkshire Hathaway, a Class B shareholder has 1/10,000th of the voting rights of a Class A shareholder. One Class A share represents a much larger piece of the Berkshire Hathaway pie (there are 585,850 outstanding Class A shares, compared to 1.3 billion Class B shares).
If having an active role in the future of a company is important to you, aim to buy the class of shares that offer voting rights (you can check this in the company’s investor centre). This gives you the ability to vote in elections for the board of directors, on proposed operational changes, and things like mergers and stock splits.
What is a stock split?
A stock split is when a company increases the number of its available shares by a multiple, but the total value of all shares stays the same. This is often done to boost the stock's liquidity; lowering the price of a single share makes it more affordable for investors, while the market capitalisation of the company stays the same so it doesn’t lose (or gain) value.
Think of it like slicing a pizza: you start with one cheesy pie worth $20. After cutting it into 8 slices you still have $20 worth of delicious pizza, but in smaller pieces. You can then buy and sell those smaller single slices instead of having to move a whole pie at a time. You can achieve something similar with investing in fractional shares, but not all share trading platforms offer this service.
Usually stock splits are done in multiples of 2-for-1 and three-for-1, but investors might remember when Tesla announced a 5-1 stock split in August 2020; the aim was to make the stock more accessible to its employees and investors. Tesla shareholders woke up to find they had five times as many shares as the day before, but the total underlying value of their investment (their slice of the pie) was the same.
What are Fractional Shares?
If you can’t afford a full share of Berkshire Hathaway’s Class A stock just yet, there’s also the option of buying fractional shares if your investment platform offers it.
A fraction of a share is a portion of a full share of a company or ETF. Fractional investing (you can do this through Hatch!) allows you to buy portions of shares instead of mortgaging your house and purchasing an entire share. Fractional shares won’t give you the voting rights that come with owning full shares, but you’ll still receive dividends.