Investing Basics: Equity Share Classes

Most UK limited companies will have just one share class – sometimes ‘ordinary’, ‘common’ or ‘voting’ shares – but it is possible for a business to have two or more distinct groups of equities in existence at any one time – writes

Ordinary shares are the most common form of share in the UK and ownership gives the right to its owner to share in the profits of the company,dividends, and to vote at its general meetings.

It is called ‘ordinary’ stock to differentiate it from ‘preference’ stock which may be issued to founders or early investors in a business and may attract different benefits as a hybrid debt/equity instrument.

Holders of preference shares may receive:

• Preference in dividends
• Preference in assets in the event of liquidation
• Convertibility to common stock.
• Callability, at the option of the corporation
• Nonvoting

Generally, preference shareholders receive dividends before holders of ordinary stock.

‘over time, ordinary shares tend to perform better than either preference shares or bonds in the market.’

In the event of liquidation, preference shareholders are subordinate to bondholders and creditors (including employees) but senior to ordinary shareholders in the pecking order when it comes to their claim on a company’s assets.

Because of this hierarchy, holders of ordinary stock often get nothing in the event of a company going bankrupt; however, over time, ordinary shares tend to perform better than either preference shares or bonds in the market.

Reasons for Having More than one Type of Share

Different share classes may be issued when a company wishes to offer different rights or privileges to a particular group of shareholders.

The individual rights relating to different share classes could potentially differ in one or more of the following ways:

• The voting rights attached to them
• Whether or not they can receive dividends
• Guaranteed or variable dividend
• Payouts received on the winding up of the company

In theory there is no limit to the number of classes or groups of shares a company can create.

Examples of Different Share Types

In this example, the three different classes of share essentially operate independently of each other in terms of how many units have been issued and the rights that are attached.

A shareholder can hold more than one class of share in the same company with different rights and benefits attached; a shareholder with 250 Ordinary Class A shares and 500 Ordinary Class B shares would possess 750 of the available 1500 voting rights but only be eligible to receive 10% (2500/250) of the dividends payable.

The breakdown by share class determines what holding an individual has in a particular company and what their rights are to vote and receive dividends.

‘share class determines what holding an individual has in a particular company and what their rights are to vote and receive dividends’

Shares may be offered in an Initial Public Offering (IPO) when companies come to market for the first time, bought in the ‘secondary market’ possibly via broker on the London Stock Exchange, or as a ‘rights issue’ to existing shareholders.

A rights issue is a further release of shares in an effort by the company to raise funds, perhaps in order for the company to be able to undertake a major project or development. Often the shareholder is offered one share for every two they hold and the company decides if these are offered at a discount, or whether the offer can be declined or sold on. If the shareholder declines, their stake in the company is diluted by the additional shares in circulation.

Other types of shares to look out for includes ‘bonus’ shares which may be given to shareholders instead of a dividend or to tie key employees into a company, ‘restricted stock’, which have specific conditions attached to them regarding their sale and transfer, and ‘penny shares’ which may offer speculative appeal due to their low cost but could offer the potential for large profits or losses in equal measure.