Introduction to Voting and Non-Voting Shares

A brief explanation of what voting and non-voting shares are and why they matter.

Voting and non-voting shares are two types of shares that are issued by publicly traded companies. The main difference between the two is that voting shares give shareholders the right to vote on important matters related to the company, such as electing the board of directors or approving major business decisions, while non-voting shares do not carry any voting rights.

Voting shares are typically held by insiders, such as company founders or executives, and give them the ability to control the direction of the company by voting on important matters. Non-voting shares are often issued to the general public and are intended to provide an opportunity to invest in the company without having any say in how it is run.

The reason why voting and non-voting shares matter is that they can have a significant impact on the value and direction of a company. For example, if a large majority of the voting shares are held by insiders, they may be able to make decisions that benefit themselves rather than the other shareholders. On the other hand, if a large number of non-voting shares are issued, it may make it more difficult for investors to have a say in how the company is run and may reduce the overall value of the shares.

Therefore, the type of shares that a company issues can have important implications for its governance, ownership structure, and overall performance. It is important for investors to carefully consider the type of shares they are buying and the potential impact on their investment.

What are Voting Shares?

Definition of Non-Voting Shares:

Non-voting shares, also known as preferred shares, are equity securities that do not give shareholders the right to vote on important matters related to a company. Unlike voting shares, the purpose of non-voting shares is to provide shareholders with a fixed dividend payment and priority over common shareholders in the event of bankruptcy or liquidation.

Purpose of Non-Voting Shares:

The purpose of non-voting shares is to provide investors with a way to invest in a company's growth potential while giving up the ability to influence the company's management or direction. Non-voting shares may be attractive to investors who are primarily interested in the potential for capital gains or dividend payments, rather than having a say in the company's decision-making.

How Non-Voting Shares Differ from Voting Shares:

Non-voting shares differ from voting shares in that they do not provide shareholders with the ability to vote on important matters related to the company. This means that non-voting shareholders do not have a say in who is elected to the board of directors, or in major business decisions, such as mergers and acquisitions.

Another key difference between non-voting shares and voting shares is that non-voting shares typically have a fixed dividend payment, whereas voting shares may have a variable dividend payment that is determined by the company's performance. Additionally, non-voting shares may have priority over voting shares in the event of bankruptcy or liquidation, meaning that non-voting shareholders may be more likely to receive their investment back in these circumstances.

Examples of Companies with Non-Voting Shares:

Several high-profile companies have issued non-voting shares in recent years. For example, Snap Inc. has non-voting shares that were issued as part of its initial public offering (IPO) in 2017. Similarly, Spotify Technology S.A. has issued non-voting shares to the public. Other examples include Berkshire Hathaway, which has Class B shares that have limited voting rights, and Alibaba Group Holding Ltd., which has issued non-voting shares in connection with its secondary listing on the Hong Kong Stock Exchange.

What are Non-Voting Shares?

Definition of Non-Voting Shares:

Non-voting shares, also known as preferred shares, are equity securities that do not give shareholders the right to vote on important matters related to a company. Unlike voting shares, the purpose of non-voting shares is to provide shareholders with a fixed dividend payment and priority over common shareholders in the event of bankruptcy or liquidation.

Purpose of Non-Voting Shares:

The purpose of non-voting shares is to provide investors with a way to invest in a company's growth potential while giving up the ability to influence the company's management or direction. Non-voting shares may be attractive to investors who are primarily interested in the potential for capital gains or dividend payments, rather than having a say in the company's decision-making.

How Non-Voting Shares Differ from Voting Shares:

Non-voting shares differ from voting shares in that they do not provide shareholders with the ability to vote on important matters related to the company. This means that non-voting shareholders do not have a say in who is elected to the board of directors, or in major business decisions, such as mergers and acquisitions.

Another key difference between non-voting shares and voting shares is that non-voting shares typically have a fixed dividend payment, whereas voting shares may have a variable dividend payment that is determined by the company's performance. Additionally, non-voting shares may have priority over voting shares in the event of bankruptcy or liquidation, meaning that non-voting shareholders may be more likely to receive their investment back in these circumstances.

Examples of Companies with Non-Voting Shares:

Several high-profile companies have issued non-voting shares in recent years. For example, Snap Inc. has non-voting shares that were issued as part of its initial public offering (IPO) in 2017. Similarly, Spotify Technology S.A. has issued non-voting shares to the public. Other examples include Berkshire Hathaway, which has Class B shares that have limited voting rights, and Alibaba Group Holding Ltd., which has issued non-voting shares in connection with its secondary listing on the Hong Kong Stock Exchange.

Pros and Cons of Voting Shares

Advantages of Holding Voting Shares:

Influence on company decisions: One of the primary advantages of holding voting shares is the ability to influence important decisions related to the company, such as electing the board of directors or approving major business decisions.

Protection of shareholder interests: By having a say in the direction of the company, voting shareholders can help to ensure that the management and board of directors are accountable to shareholders and acting in their best interests.

Potential for higher returns: In some cases, holding voting shares may provide investors with the potential for higher returns, as they may benefit from the company's growth potential and success.

Disadvantages of Holding Voting Shares:

Limited power: Despite having the ability to vote on important matters, individual shareholders may have limited power to influence the direction of the company, particularly if the majority of voting shares are held by insiders or institutional investors.

Increased risk: Holding voting shares may also increase an investor's risk, as they are more exposed to the potential negative impact of company decisions or events.

Lower dividend payments: In some cases, voting shares may have lower dividend payments than non-voting shares, as the company may prioritize reinvesting profits to fund growth initiatives.

Factors to Consider When Deciding to Buy Voting Shares:

Company performance and growth potential: When considering whether to buy voting shares, investors should evaluate the company's financial performance and growth potential to determine whether it is a good investment opportunity.

Ownership structure: Investors should also consider the company's ownership structure, including the number and percentage of voting shares held by insiders or institutional investors, to determine how much influence they may have in the company's decision-making.

Risk tolerance: Investors should also evaluate their risk tolerance and consider whether the potential benefits of holding voting shares outweigh the potential risks. This includes considering factors such as the company's industry, competitive landscape, and regulatory environment.

Pros and Cons of Non-Voting Shares

Advantages of Holding Non-Voting Shares:

Fixed dividend payments: One of the primary advantages of holding non-voting shares is the assurance of receiving a fixed dividend payment, which can provide investors with a reliable source of income.

Priority in bankruptcy or liquidation: In the event of bankruptcy or liquidation, non-voting shareholders may have priority over common shareholders, which can provide an added level of protection for their investment.

Exposure to growth potential: Non-voting shareholders may still benefit from the company's growth potential and success, as the company's financial performance can impact the value of its investment.

Disadvantages of Holding Non-Voting Shares:

Lack of voting rights: The primary disadvantage of holding non-voting shares is the lack of voting rights, which means that investors do not have a say in important decisions related to the company.

Limited potential for higher returns: Non-voting shares may have a fixed dividend payment, but they typically do not provide investors with the potential for higher returns that voting shares may offer.

Reduced accountability: Without the ability to vote on important matters, non-voting shareholders may have limited ability to hold the company's management and board of directors accountable for their actions.

Factors to Consider When Deciding to Buy Non-Voting Shares:

Dividend payments: Investors should evaluate the company's history of dividend payments and the size of the fixed dividend payment associated with non-voting shares to determine whether they provide a satisfactory return on investment.

Company financials: Investors should also evaluate the company's financial performance and growth potential to determine whether the investment aligns with their financial goals and risk tolerance.

Ownership structure: Non-voting shareholders should also evaluate the company's ownership structure to determine the level of control that insiders and institutional investors have over the company's decision-making.

Company reputation: Investors should evaluate the company's reputation and history of corporate governance to determine whether it aligns with their values and whether they feel comfortable investing in the company.

Differences in Valuation between Voting and Non-Voting Shares

How voting and non-voting shares are valued differently

Voting and non-voting shares are valued differently because they offer different rights and privileges to shareholders. In general, voting shares are considered more valuable than non-voting shares because they provide shareholders with a say in the company's decision-making, which can impact the company's financial performance and ultimately its valuation.

When a company has both voting and non-voting shares, the value of the company is typically based on the total market capitalization of all outstanding shares. However, the market value of voting shares is usually higher than that of non-voting shares because investors are willing to pay a premium for the added rights and privileges associated with voting shares.

Impact of voting and non-voting shares on company valuation

The impact of voting and non-voting shares on company valuation depends on the ownership structure and the percentage of each type of share that is outstanding. If the majority of shares are voting shares, then the company's valuation may be more closely tied to the opinions and decisions of the voting shareholders. Conversely, if the majority of shares are non-voting shares, then the company's valuation may be less influenced by the opinions of shareholders and more closely tied to the company's financial performance.

How investors can use voting and non-voting shares to their advantage

Investors can use voting and non-voting shares to their advantage by carefully evaluating the ownership structure and understanding the potential impact of each type of share on the company's decision-making and financial performance. For example, if a company has a large percentage of non-voting shares and a history of strong financial performance, investors may still choose to invest in the company despite the lack of voting rights. Alternatively, if a company has a large percentage of voting shares and a history of poor financial performance, investors may choose to avoid investing in the company due to concerns about the company's decision-making and governance practices. Ultimately, the decision of whether to invest in voting or non-voting shares depends on an investor's financial goals, risk tolerance, and evaluation of the company's potential for success.

Conclusion:

In summary, voting shares provide shareholders with the right to vote on important company decisions, while non-voting shares do not. Both types of shares have their own advantages and disadvantages, and investors should carefully evaluate the ownership structure, financial performance, and governance practices of a company before deciding whether to invest in voting or non-voting shares.

The ownership structure of a company can have a significant impact on the company's valuation and decision-making, and investors should be aware of the potential risks and opportunities associated with each type of share. Ultimately, the decision of whether to invest in voting or non-voting shares depends on an investor's financial goals, risk tolerance, and evaluation of the company's potential for success.

Understanding the differences between voting and non-voting shares is important for investors who are looking to make informed decisions and achieve their financial goals. By carefully evaluating a company's ownership structure and financial performance, investors can make informed decisions about whether to invest in voting or non-voting shares and potentially benefit from the growth potential and dividends of a successful company.