Share Class: Meaning, Types, Merits & Demerits
Before buying shares, it is important for investors to know that companies classify their shares based on various classes. Each class offers its buyers some specific privileges like voting rights, shareholder rights, dividend rights, rights to capital, etc., depending upon the organisation’s requirements. Let’s dive deeper into this matter.
What Is a Share Class?
When you buy a company’s shares, it gives you access to various rights. The type of privileges you get depends upon the class of shares you invest into. They determine your authority and give you the right to participate in the organisation’s internal affairs.
While choosing the class of shares, you should keep in mind some parameters like returns, future goals, affordability, risks, needs, etc.
From a business perspective, here are a few reasons why companies categorise their shares into different classes:
- To allocate a level of ownership to an investor based on his/her share class
- Maintain control over the organisation and keep the power to take decisions with the board
- Distribute dividends depending on the share class
- Provide and limit voting rights based on the purchased class
- Prevent hostile buyouts/takeovers
What Are the Types of Share Classes?
Companies generally issue three classes of shares for public borrowing:
- Class A Shares
An organisation generally issues class A shares when it offers its stocks to the public via Initial Public Offering (IPO). This share class carries the most weight among all the classes and accredits voting rights to its owner. Moreover, a company also allocates a part of its profits to class A shareholders.
From an investor’s perspective, when you purchase Class A shares, you can voice your advice, suggestions, and concerns in the company’s annual meetings. In addition, when the business makes a profit, you will get your share in the form of dividends. Even during the liquidation process, you will be the first to receive returns.
- Class B Shares
Compared to the previous category, Class B shares will provide you with lesser voting rights in an organisation’s affairs. Class B shares are lower in payment priority than Class A shares. That means if a company were to go bankrupt and be forced into liquidation, Class A shareholders would be paid out first, then class B. Sometimes, a company offers a class B of shares with a lower share price to attract individual investors. Mutual Funds hold these shares as they come with a low front-end load, and if you hold on to them for the long term, there is no back-end load applicable.
- Class C Shares
This share class comes with no voting rights. You will have to pay a front-end load, a level load for managing your investment, and a 1% back-end load while drawing out. This can be the best type of investment if you are planning to invest in a company for the short term.
What Are the Advantages of Having Share Classes?
The advantages of share classification are as follows:
- Offers Flexibility to Businesses While Raising Funds
Share classification offers a good amount of flexibility to a company that wants to raise capital by selling its shares. It can retain those shares that provide more control and sell off those with less voting power.
- Helps Investors Select a Suitable Investment Option
With the help of share classification, you can choose to invest in a class that aligns with your investment objective and risk appetite. For short-term investments, Class C shares are the best. However, if you want to stay invested for a longer duration, you may go for Class A or Class B.
Apart from these major advantages, share classification helps a company create structure and hierarchy within an organization. It also helps them distribute rights and privileges among its shareholders.
What Are the Disadvantages of Having Share Classes?
Apart from the numerous benefits that share classification brings to the table, it has some drawbacks too. For you, as an investor, encountering three different types of shares while purchasing stocks can be a confusing affair.
You have to pay attention to which share class you are buying, or you may end up purchasing the wrong kind. Moreover, different share classes have varying fees, so if you choose the incorrect one, it may end up underperforming, and you might not get your expected returns.
Therefore, it is always good practice to check the share classes before making any investment decision.
Generally, in India, only one class of share is publicly traded in stock markets, while other classes are held privately and have restrictions to sell.
To sum up, you can choose Class A or B shares if you want to have voting rights in a certain company. However, if you are looking for a short-term investment, Class C shares might be the best way to go.
Before purchasing shares, do conduct a thorough market analysis of the company’s fundamentals and long-term growth potential. It will help you make an informed decision.
Frequently Asked Questions
Which is better, Class A or B shares?
Compared to Class B, Class A shares provide significantly more voting rights to their investors. However, they may be more expensive and might not be available for sale to the general public.
What is the meaning of voting rights within a company?
The voting right is the power given to a shareholder to voice his/her opinions on the company’s corporate policy, approving dividends, mergers, acquisitions, board of directors’ selection and appointment, etc.
Is the profit from selling shares taxable?
If you hold your shares for less than 12 months, Short Term Capital Gains (STCG) would be taxed at 15%, irrespective of your tax slab.
For tax savings, you can consider selling after holding your investment for a year or more. This will help you get the tax benefits of Long Term Capital Gains (LTCG). The LTCG tax rate is flat at 10%, along with a tax exemption on gains up to ₹1 lakh.
Do I need to pay taxes on dividend income?
Yes, any income thu receive from dividends, whether from direct equity investments or mutual funds, is liable for taxation. However, the taxability depends on whether you have received the dividends as a stock trader or an investor.
If you are a trader, dividends shall be taxed under the head business income. For investors, the income tax head would be income from other sources.