Class A shares is a term for both stocks and mutual funds. With stocks, Class A shareholders have the most rights of any shares issued by the company. So, why would an investor purchase a class a share over a common share? The short answer is that an investor or owner in the company will purchase Class A shares to retain control of the company. For example, if a company has 1,000,000 shares of common stock to issue, it can also issue 200,000 shares to the owners where the Class A shares have a voting right of 10 to 1. Therefore, while there are more common shares released to the public, the owners have a controlling interest due to the fact the Class A shares will have 2M votes. Below is a list of common rights that are associated with Class A stockholders:
Special voting and vetoing rights
Priority when a company liquidates assets
The right to convert from preferred stock to common stock
The above are just some examples of special rights assigned to Class A stockholders, but the majority of companies will have additional rights and rules listed in the company’s by-laws.
Class A Mutual Fund Shares
A Class A mutual fund is a fund where a fee is paid to the fund manager upfront in order to open the account. This fee can range anywhere between 1 to 5 percent. So, if you are looking to invest $50,000 and there is a 5% fee, you will invest $47,500 and then $2,500 will be paid to the fund manager. An investor should be sure that the fund manager will be able to outperform the market over a number of years in order to recoup the initial fees. An investor should also have an investment time line of 5 – 10 years in order to truly capitalize on their investment. One of the benefits of Class A shares is that the 12-b-1 fees are waived or dramatically reduced. One of the downsides to Class A mutual funds is that the managers will take greater risks in order to produce higher returns due to the upfront fees. Class A funds also require a greater investment than a standard mutual fund. This investment requirement can range between $5,000 – $25,000. The biggest misconception with Class A shares is that the investor is paying for higher quality. The one thing to know with investing is that higher fees does not equal greater returns. So, why would someone invest in a Class A mutual fund? While the fees are high up front, as more money is invested, the fees are greatly reduced as certain breakpoints are hit. A breakpoint is certain dollar amount that is invested. For example, if a minimum investment is $25,000, the next breakpoint could be $50,000. At this point the fees associated with investing the money are reduced. An investor can actually work it out with the fund that if a large lump sum is invested the fees can be drastically reduced.
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