Differences Between Voting and Nonvoting Stock

When individuals or entities invest in a company by purchasing its stock, they are buying a piece of that company. But not all stocks are created equal. There are two primary categories to be aware of: voting stock and nonvoting stock.

Here are the essential differences between these two:

1. Voting Rights:

Voting Stock:

• Owners of voting stock have the right to vote on certain company decisions, such as electing members to the company's board of directors.
• They may also vote on major company policies or decisions, like mergers or acquisitions.

Nonvoting Stock:

• Owners do not have the right to vote on company decisions or board elections.
• They primarily invest for financial benefits like dividends, without direct influence over company decisions.

2. Dividends and Financial Returns:

Voting Stock:

• May receive dividends, but this depends on the company's profitability and its policies regarding dividend distribution.
• The financial return largely depends on the company’s performance and market conditions.

Nonvoting Stock:

• Often, nonvoting stock (or a separate class of stock without voting rights) is issued with a slightly higher dividend yield to compensate for the lack of voting rights.
• Just like voting stock, its value can increase or decrease based on the company’s performance and market conditions.

Why Companies Issue Nonvoting Stock

Control: Companies might issue nonvoting stock to raise capital without diluting the control of the company’s founders or other major stakeholders. With that said, the IRS does not typically view these as a different classes of stock of tax purposes.

Flexibility: It allows companies to offer stock to the public or employees without granting them a direct say in company decisions.

Liquidity and Market Availability: Both voting and nonvoting stocks can be bought or sold in the stock market, but their availability and demand might differ. For instance, a company might have more nonvoting stock available than voting stock, or vice versa.

Conversion: Some nonvoting stocks come with the option to convert them into voting stocks after meeting specific conditions or after a certain period. This feature, however, is not standard and depends on the company’s policies.

Takeaway:

When considering an investment in a company, it is vital to understand the kind of stock you are purchasing. If you want a say in company decisions, voting stock is the way to go. If you are primarily interested in financial returns and are less concerned about influencing company direction, nonvoting stock might be a suitable option.

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