Why some stock shares are out of your reach

Some companies issue multiple share classes as a way to keep decision-making power in the hands of a select few.

Adam Zoll 22 September, 2014 | 6:00PM

Question: What does it mean when a company issues different share classes of its stock? And how do I know which share class to buy?

Answer: Companies whose ownership structures include more than one share class of common stock typically are set up this way to concentrate decision-making power in the hands of a relatively small group of key stakeholders. For example, a company might offer A and B share classes, with owners of each receiving the same dividend payout per share (assuming the company issues a dividend) but with A shares providing 10 times the voting rights, or decision-making power, of B shares. By controlling enough A shares these key individuals effectively have the ability to make decisions without having to persuade those owning less powerful B shares to go along.

So who owns these more powerful share classes? Typically they are granted to company founders, key executives and major investors when the company goes public. Putting greater voting power in the hands of these key individuals may be seen as a way to ensure that control of the company stays in the hands of those who know it best. In many cases the more powerful share class is not traded publicly, but company insiders who hold such shares may convert them to the less powerful share class in order to sell them on the open market and thus cash out part of their equity in the firm.

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Adam Zoll

Adam Zoll  Adam Zoll is an assistant site editor with Morningstar.com

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