What is an Alphabet Stock: The Complete Guide

Key Highlights

• Alphabet stocks are shares of listed companies that are divided into various share classes.
• Alphabet stocks are typically categorised as ".A shares" or ".B shares."
• These shares frequently have different dividends and voting rights.
• Alphabet stock can be used to indicate ownership in a particular subsidiary company instead of the parent firm.

What is Common Stock?

The cash or money a business raises via the issuance of shares is known as common stock. These shares offer ownership of a claim to the company's profits. Investors may also get voting rights in the company matters. It could also imply having a seat on the board of directors of the firm. Collectively, these shares make up the company's common stock.

In the case of liquidation, owners of common stock receive payments after the debt holders, preference shareholders, and other bondholders of the organisation. However, greater risk yields greater rewards. As long as common investors are eligible for a portion of the company's profits, they continue to gain. Therefore, they too, become beneficiaries of the overall growth of the company.

Common stocks are categorised into a number of groups based on how they operate, like growth, dividend, hybrid, etc. The alphabet stock is a type of common stock only. Yet, it is not the same as the common stock.

What is an Alphabet Stock?

An alphabet stock is a distinct class of common stock of a particular subsidiary of a company subsidiary. In a broader sense, it refers to common stock shares that are unique from other common stock held by the same business. They are referred to as alphabet stocks because of the system of classification. Each class of common stock is identified by letters to set it apart from the stock of the parent firm. The voting rights of alphabet shares may differ from those of the parent company's stock.

The regulations governing the division of voting rights among alphabet share groupings are not very strict. It is possible that the voting rights and dividends of two alphabet stocks may differ.

Reason for the Unique Name

The terminology of alphabet stocks played a role in its naming. A period and a letter are appended to the primary company's stock name to denote an alphabet stock. Assume that ABC represents the company's common equity. ABC.A or ABC.B can be the alphabet stocks of the firm.

Understanding Alphabet Stock

Businesses that issue alphabet stock often offer separate voting and dividend rights to each class of common stock. Consider the following scenario. Suppose there’s a company called ABC. Let’s say it sells two distinct classes of equity shares. To set the two classes apart, it gives the alphabets X and Y. All the rights of common stock are now granted to the firm’s Class X shares. Class Y shares, on the other hand, don’t have voting rights. They only offer dividends. The stock symbols for the company's two classes of common stock are ABC.X and ABC.Y.

If it wants to issue equity shares with regular voting rights but no dividend rights, it has to offer a new class of shares. It could be named as Class Z shares. For this third class of shares, ABC.Z would be the stock symbol. Shareholders can properly distinguish between the two share classes thanks to this categorisation.

In India, publicly traded U.S. firms may also issue alphabet stocks which have subsidiaries. In this scenario, every class of equity shares would be linked to a particular subsidiary of the parent firm. For instance, suppose company ABC is a publicly traded parent company which has four subsidiaries.

A, B, C, and D are the four classes of equity shares that the firm may issue. Each of them is associated with a different subsidiary. In this instance, the parent company's stock symbol would be ABC. The stock symbols of its subsidiaries shall be ABC.A, ABC.B, ABC.C, and ABC.D.

Why Do Companies Issue Alphabet Stocks?

Companies may choose to issue several classes of common stock for a variety of reasons. Here are some of the key ones among them.

By issuing a second class of shares with fewer voting rights, the company's founders and major investors can continue to control the firm.

Businesses don't have to dilute the holdings of existing shareholders to raise additional cash.

By offering several classes of common stock, companies can defend themselves against hostile takeover offers from outside parties.

Conclusion

The Alphabet stocks represent a unique category of common stocks. They are usually the subsidiaries of a parent company. Each class is denoted by letters. This differentiates the subsidiary stocks from the parent company. Firms issue alphabet stocks to maintain control of a firm and raise funds without diluting existing holdings. They are also a good way to protect a company from hostile takeovers. Understanding these distinct classifications can help investors to know companies in detail and invest in the right stock.