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Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors.
Before trading, please ensure that you fully understand the risks involved
Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors. Before trading, please ensure that you fully understand the risks involved

Wednesday, February 01, 2023

What are dual stocks in stock trading?

By Century Financial in Blog

What are dual stocks in stock trading?
What are dual stocks in stock trading?

You might have to navigate through complex algorithms and calculations in the trading world. But one ratio that every investor can rely on is 1:1. One share, one vote. However, several companies follow a dual stock structure with two or more share classes and a difference in voting rights. While dual stocks have existed since the 1920s, recent IPOs have drawn attention to this alternative voting structure. So, let's find out all that you need to understand about dual stock trading.

What are dual stocks?

Dual stocks, or dual-class shares, divide a company's shares into two classes (or more), which differ in value and voting rights. Usually, the stock division enables a group of investors or founders to retain control over the company with majority voting rights. Dual stock trading occurs during an IPO or company restructuring.

Understanding share classes

As the shares are divided, it creates two share classes. One part is offered to general investors (Class A), while the other is available to founders and major executives in the company (Class B), making it the founders' class. Look at the two aspects differentiating Class A and Class B shares:

It must be noted that these classes of shares do not define the standard power balance. Hence, the voting power of Class B shares is not always the highest. Class A may have more voting power than Class B due to the organizational structure.

Let's look at a few examples

In 2004, Alphabet (Google's parent company) announced its IPO with three share classes. Class A shares were distributed to general investors, each share carrying one vote. Top firm executives received Class B shares, with ten votes per share. The Class C shares, which had no voting rights, were held exclusively for Google employees.

Google created three share classes to preserve corporate control in the company after it was reorganized as Alphabet Inc. However, having two classes is a more common practice. Such companies include Berkshire Hathaway, Warren Buffet's multinational conglomerate company and Groupon, among others.

Benefits of dual stocks

Dual stocks provide good insulation against the market's short-term mindset, which may affect a founder's long-term visions. They work well for companies because -

The primary benefit of dual-class shares is that the founders can preside over the company's decision-making and operations without obstruction from general investors.
The PVRs linked to dual shares enable company founders to maintain control over the business without running the danger of a hostile takeover.
Technology businesses can benefit from dual-class stocks because they enable founders to raise equity without losing control.
Without worrying about giving its investors too much voting power, companies can still obtain public financing.

Disadvantages of dual stocks

You can only make a sound investment by looking at the whole picture. Dual stock trading can have drawbacks as well -

A common criticism about the dual-class stock structure with PVRs is that it gives a select few people better voting rights. Most shareholders have less voting power despite contributing the lion's share of the capital. As a result, the risk allocation becomes skewed, favoring the founders and top executives.
With founders and top executives having most of the power, they could misuse it leading to adverse impacts on the company's finances.
Due to their limited power, public shareholders cannot supervise the company's board and management.

Balance is the way to go

To prevent a lopsided power struggle between founders and shareholders, companies should strike a balance between dual and single-class stocks using checks and balances. If you are online trading in dual stocks, looking at the full scenario of the voting powers and dividends is ideal before investing in that company.

Disclaimer: Century Financial Consultancy LLC (“CFC”) is Limited Liability Company incorporated under the Laws of UAE and is duly licensed and regulated by the Emirates Securities and Commodities Authority of UAE (SCA). This document is a marketing material and is for informational purposes only and must not be construed to be an advice to invest or otherwise in any investment or financial product. CFC does not guarantee as to adequacy, accuracy, completeness or reliability of any information or data contained herein and under no circumstances whatsoever none of such information or data be construed as an advice or trading strategy or recommendation to deal (Buy/Sell) in any investment or financial product. CFC is not responsible or liable for any result, gain or loss, based on this information, in whole or in part. Please carefully read full disclosure mentioned on the website.