In this clip from Motley Fool Answers, the cast tackles the topic of share classes. Some types have more voting rights — and some have none at all — but does that significantly change the investment thesis?
Should investors in a company prefer one or the other? And do the different share prices move in sync?
A full transcript follows the video.
This video was recorded on June 27, 2017.
Alison Southwick: It’s time for Answers, Answers and today we’re actually going to tackle two questions — two very similar questions. One is from Kevin and the other is from Andy. So Andy writes, “What’s the difference between a company’s Class A stock versus Class C? I know different shares typically have different rights in a company, but how does that affect it as an investment?” Then Kevin wants to know, “For an investor who’s not concerned about voting, is there any real difference, or is it beneficial to own both types of shares? Do they both increase or decrease at the same proportion?” So Dylan is going to give us just a quick master class in the different types of share classes.
Dylan Lewis: That’s a lot of pressure, but I’ll try.
Southwick: Here we go.
Lewis: So that second question really answers the first question in a way. The different share classes really just boil down to different shareholder rights, and if you want to think about a really high-profile example of a company with two different share classes to help illustrate this a little bit, look at Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG) — or Google, as many people know it.
The A Shares trade under the ticker Google, GOOGL and the C shares trade under, GOOG. The A shares are slightly more expensive and that’s because they wield one vote, whereas the C shares are non-voting shares. So it really comes down to your say as a shareholder when it comes to votes and things like that.
Southwick: So as an individual investor, I’m only going to be buying like 100 shares.
Lewis: Of Google? Good for you!
Southwick: Well, OK, fine. I only have like a share of Google, but the point is… OK, that makes my point even more. I’m only going to have one, little, lonely vote, so does it really matter?
Lewis: Not really. Honestly…
Southwick: For me, no. It’s OK.
Lewis: The easiest explanation, here, is it doesn’t make much of a difference as you tee up. Like if you only have a few shares, you’re not going to be able to really do that much, but if you’re a major institution and you have a sizable chunk of shares, having that voting say can be valuable, and that’s why the voting shares command a slightly higher price.
As an individual investor, like I said, it doesn’t matter all that much. If you look, there’s generally a pretty consistent spread between A and C shares for most businesses. For Alphabet, for example, the C shares have typically traded at a 2-3% discount relative to the A shares, so I would say as long as you’re seeing that spread hold consistent, it doesn’t matter which one you buy; the caveat being if you see that spread widen, it might be an opportunity to buy the C shares because they’re trading at a larger discount than the A shares. There have been times where that spread has reached 5%, or something like that, at which case, it might make sense to buy the Cs instead.
Robert Brokamp: I did a little research on Berkshire because I was curious if it was the same thing. You have the A shares, which are now worth $253,000 each.
Lewis: Alison owns a hundred.
Southwick: You know, whatever.
Brokamp: That’s right. I’ve got the B shares, which are trading at $169, so they’re 1/1,500 of the A shares. But the voting, you only have 1/10,000 of a vote with the B shares, so you still have voting rights with the B shares, but they’re significantly watered down.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Alison Southwick has no position in any of the stocks mentioned. Dylan Lewis owns shares of Alphabet (A shares). Robert Brokamp, CFP owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.