What is a Share Class?

Last Updated: 17 Jan 2025

You can invest in a company in myriad ways, and one such channel is mutual funds. They are one of the most popular wealth-accumulating financial avenues in the past few years. It is important to note that companies classify their shares into various classes. Each share class carries a distinct set of privileges like shareholder rights, rights to capital, voting rights, dividend rights, and a few others based on the company’s needs.

As an investor, you have to be wary about the share class type you are purchasing. It defines and determines the rights you are authorized to hold concerning a company. In this article, let’s dive into the concepts of share classes and their types.

Share Class

Investors who buy shares from a company are vested with different rights. There are three types of share classes – Class A, Class B, and Class C. Each share class comes with multiple charges like front-end load, back-end load, deferred charges, 12b-1 fee, etc. The fee structure is different for each share class. Whether you’re buying common stocks or mutual fundsunits, it’s critical to have some basic know-how on that particular asset class. Now, companies group shares because of several reasons. Here are a few of them enlisted below.

1. To designate a level of ownership to the investor based on the share class.
2. To have a command over the company and keep the decision-making rights with the board.
3. To allocate the dividends and dictate the income as per the share class.
4. To grant and limit voting rights based on the investors’ share classes.
5. To protect the company from opposed buyouts.

Share classes are distributed or introduced to the investors when a private company decides to go public. Thus, they bifurcate the shares into categories and rank them in order. The type of share class you purchase decides your credibility and say, inside and within the company. Eventually, this helps investors choose the share type based on a sundry of parameters like affordability, needs, risk, future goals, returns, etc.

Finally, when a privately owned company issues shares to the public, it’s implicitly selling a partial stake of its entity to the investors. For example, Asian Paints sells 30% of its stake to investors by issuing 100 shares. Buying one share of Asian Paints grants you 3.33% of the possession in the company. While this is a simple use case, in reality, companies deal with them in millions.

Types of Share Classes

Companies can raise capital in three different ways. They can either borrow money from friends and family or go for a bank loan. They go for the third option, i.e., public borrowing, especially when it’s about millions. That kind of money can only be generated from the outside. So, they issue shares by grouping them into varied classes – Class A, B, and C. Let’s understand about each share class in brief.

• Class A Shares:

  Companies issue Class A shares when they go public through an IPO. These shares are also called common stock or shares. This class of shares holds voting rights in the company and have more weight than any other share class issued in the company. Investors who buy Class A shares are accredited to get a part of profits made by the company.

  These shareholders are given the right to enunciate their concerns, suggestions, and advice in the annual meetings held by the company. These investors also get a share of dividends when the company makes sound returns. Even during the liquidation, these shareholders are the first to be paid.

• Class B Shares:

  Unlike Class A shares, this share class has fewer voting rights in the company matters. They are like second-best shares with fewer benefits. The front-end load for these shares is comparatively low. Also, investors don’t need to pay any back-end load, if and only if they hold them for a long horizon.

• Class C Shares:

  If you are an investor on a quest for a short-term investment, then Class C shares fit your bill. Upon buying these shares, they’ll be front-end load, followed by the level load for managing your investments and 1% back-end load when you draw out. These share class holders also don’t have any voting rights in the company.

How to Choose Between Share Classes

It’s important to carefully evaluate your financial status and investing objectives before choosing the right share class. In order to ensure that the suggestions are in line with their particular situation, investors should speak with a financial advisor who can offer objective advice. It is crucial to select an adviser who is not connected to any particular fund since this will assist to avoid any possible conflicts of interest. Investors should evaluate their financial situation, investment goals, and investment horizon before selecting Class A, Class B, or Class C shares.

Shares of Class A and Class B are generally better suited for long-term investors who can afford to handle higher cost ratios. These shares may offer more stability for investors seeking long-term capital growth and typically grant voting rights. Conversely, Class C shares are better suited for novice or short-term investors due to their reduced expense ratios and lack of voting rights. Individual investors or those with smaller portfolios may also find these shares appealing since they provide a more cost-effective starting point with lower initial expenses.

The share class’s discounts, the fund’s load or lack thereof, and the minimum investment needed are further considerations for investors. To guarantee the investment’s long-term viability, the total cost ratio and the shares’ affordability should match the investor’s financial capabilities.

Benefits of Different Share Classes

The classification of share classes includes the following benefits:

• Regardless of the division of the shares, the company grants the power to control the shareholders. These share classes decide to what extent you have the ownership and control rights in the company. Overall, this division helps the investor and the company manage their rights and privileges.
• It helps investors pick a suitable share class that meets their investment obligations. Class A and B are for long-term investors, and Class C is for short-term investors
• It helps investors in generating income by earning dividends on their investments.
• When the company endures liquidation, the assets get distributed to the investors in their respective proportions. The share type helps the company decide the ratio at which the assets get apportioned to the shareholders. Also, each class has its curbs and stipulations.
• It helps companies in generating capital, as well as helps investors in diversifying their portfolios. So, it’s a win-win strategy for both parties.
• It creates hierarchy and structure in the company.

Conclusion

To sum up, choosing the appropriate share class requires carefully weighing a number of variables, including risk tolerance, investing objectives, expense ratios, and your financial situation. It’s critical to assess if a more affordable alternative meets your investing objectives or if you can handle higher expenses. Your decision is greatly influenced by several factors, such as discounts, whether the fund is loaded or not, and the minimum investment needed.

Investors at IIFL Capital have access to a large spectrum of choices meant to fit varying financial goals and risk tolerance. IIFL offers thorough tools and professional guidance to help you select the best share class.

Whether your goals are capital preservation, income, or development, you can make sure your selected investment path fits your financial situation by working with a trustworthy advisor.

Frequently Asked Questions

1. What are Class A and Class B Shares?

While purchasing mutual funds, you’ll see a set of share classes to opt for as per your investment capability and preferences. There are multiple share classes like A, B, C, D, and I. Class A shares are issued by companies when they decide to go public. They are common stock of the company and possess more voting rights and are levied with a front-end fee. Class B shares have fewer voting rights when juxtaposed with Class A shares. These shares are levied with front-end charges.

2. Which Share Class is The Best?

There is no definitive answer for this question, but each share class has its perks and limitations. For instance, Class A and Class B shares are apt for investors willing to go long-term. And Class C shares are for investors who have a minimal amount to invest and are just getting started with their investment journey. These shares are apt for short-term purposes. You have to check the load and other expenses before you choose the share class. These charges will make a difference to your investment and earnings.

3. What is Share Class Series?

Simply put, these are share classes designed by the company grade-wise or rank-wise that differentiates by their rights and privileges. Each class group has its share of differences and ebbs and flows. As an investor, you need to be cautious before buying the share class.

4. How do share classes affect investors?

Share classes affect investors by influencing things like expense ratios, dividend payments, and voting rights. Investors may better match their options with their objectives by knowing what a share class is, as each class has unique benefits.

5. What are the fees associated with different share classes?

Fees differ depending on the share class. Overall returns are impacted by the higher upfront prices of Class A shares, the higher yearly fees of Class B shares, and the high continuous expenditures of Class C shares.