Question

When looking at a company’s common stock we could sometimes see more than one class of shares. Which of these is accurate in that situation?

Question 15 options:

a)	investors are indifferent between class A and class B shares. (i.e. they do not care which they are buying)

b)	different classes of shares may have unequal rights to dividends and votes

c)	the Securities and Exchange Commission allows only one class of common stock.

d)	all shares, no matter how many classes, are all created with the same equal rights.

Answer 1

The correct option is "b".

There are different classes of shares based on the voting rights of each class and also dividend rights. So it is important for investors to check the class of shares before buying. Class of shares which doesn't have voting rights trade at discount. Companies issues such class of shares with no voting rights when they do not want dilution of ownership. Share class with voting rights creates difficulty for management to make important decisions, as the decision needs to pass by majority of votes.

Once a subordinate class of share runs pari-passu with the main class, then subordinate class start to enjoy equal rights as of main class.