What Is a Share Class?
Let me explain what a share class really is. It's a designation for a specific type of security, like common stock or mutual fund units. If a company has multiple classes of common stock, they label them with letters, such as Class A or Class B, and each comes with its own set of rights and privileges. Mutual funds do something similar, with classes that have different sales charges, expense ratios, and minimum investment requirements.
You need to pay attention to the share class when you're buying, whether it's stock in a public company or units in a mutual fund. It directly affects what you get out of your investment.
Key Takeaways
- Share class refers to different types of company or mutual fund stock; they are designated by letter or by name.
- Different classes of company shares often carry different privileges, such as voting rights.
- Different classes of mutual fund shares incur differing fees and expenses.
The Basics of Company Share Classes
Within the same company, different share classes give stockholders varying rights. Take a public company that might have Class A and Class B common stock; this setup is often decided when the company goes public and issues stock in the primary market.
Consider a private company doing an IPO: they might issue Class A shares to new investors while giving Class B shares to existing stakeholders. This dual-class structure lets the original owners sell most of their stake but keep control through enhanced voting rights on Class B.
Look at Google as an example—they set up a dual share class when becoming Alphabet Inc. in 2015. They have A-class shares (GOOGL) with voting rights, C-class shares (GOOG) without voting rights but similar pricing, and B-class shares for management to maintain control.
The Basics of Mutual Fund Share Classes
Mutual funds typically offer multiple share classes, all investing in the same securities with identical objectives and policies. The differences come in fees, expenses, and sometimes initial investment amounts, which affect overall performance.
The A-share class is common and includes a front-end load paid upfront, ranging from 2% to 5.75% based on the fund and purchase size. It might seem expensive at first, but it can be cheaper long-term if you hold onto it.
B-shares work differently with a back-end load paid when you sell, which decreases over time and hits zero eventually. They often convert to A-shares after about seven years and usually have higher expense ratios than A-shares.
C-shares charge a level-load annual fee of around 1% for the fund's life, plus a possible contingent deferred sales charge if sold within a year. Like B-shares, they tend to have higher expense ratios compared to A-shares.
Institutional Share Classes
Beyond A, B, and C, there are classes like I, R, N, X, and Y, known as institutional shares. These are generally for high-net-worth individuals with over $1 million or institutional investors making large deposits. Even 401(k) plans qualify by pooling employee contributions, allowing access to these low-fee options.
Institutional shares have the lowest fees and expenses, leading to the best returns. Take Vanguard: their Investor shares require $1,000 to $3,000 initially with a 0.18% average expense ratio. Admiral shares need $3,000 to $100,000 and average 0.11%. Institutional shares start at $5 million with just 0.05% expense ratio.
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