Types, Classes, and Voting Rights of Equity Securities

Updated for the 2026-2027 CFA® Level I curriculum.

Equity securities represent ownership claims on a company's assets and earnings. The CFA Level I curriculum asks candidates to distinguish common stock from preferred stock, recognize different equity classes within the same company, and understand how voting rights differ across those classes. After reviewing this note, you should be able to identify which type of equity security or voting structure a question describes and explain what that structure means for control and cash flow rights.

Key Takeaways About Types, Classes, and Voting Rights of Equity Securities

• Common stock gives shareholders a residual claim on earnings and assets after all other claims are paid.

• Preferred stock typically pays a fixed dividend and ranks above common stock in claims on assets, but usually carries no voting rights.

• Companies can issue multiple classes of common stock with unequal voting power, often labeled Class A and Class B.

• Statutory voting gives one vote per share for each director position up for election.

• Cumulative voting lets a shareholder pool all voting rights and cast them for one or a few directors, which helps minority shareholders gain board representation.

• Callable and convertible features can apply to preferred stock but do not change its position below debt and above common stock in the capital structure.

• Voting rights, not dividend priority, are the main distinction tested when comparing equity classes.

What You Need to Know for CFA Level I

• Identify the defining characteristics of common stock versus preferred stock.

• Recognize why companies create multiple share classes and how voting power can differ across classes.

• Distinguish statutory voting from cumulative voting and know which favors minority shareholders.

• Apply common versus preferred stock differences to a scenario involving dividends, liquidation, or control.

• Avoid confusing dividend priority (a cash flow right) with voting power (a control right).

Characteristics of Major Equity Security Types

Common stock is the most basic equity security. A common shareholder owns a residual claim on the company's assets and earnings. That means common shareholders get paid last, after creditors and preferred shareholders, but they also gain the most if the company performs well. Common stock normally carries voting rights, giving shareholders influence over major decisions like electing the board of directors.

Preferred stock sits between debt and common equity in the capital structure. Preferred shareholders receive a stated dividend, often expressed as a percentage of par value, before any dividend is paid to common shareholders. In a liquidation, preferred shareholders have a claim on assets ahead of common shareholders but behind creditors and bondholders. Most preferred stock does not carry voting rights. Preferred stock can include additional features:

• Cumulative preferred stock requires unpaid dividends to accumulate and be paid before common shareholders receive any dividend.

• Convertible preferred stock can be exchanged for a set number of common shares.

• Callable preferred stock can be redeemed by the issuer at a specified price.

These features change the cash flow characteristics of preferred stock but do not give the shares voting rights unless specifically stated.

Differences Among Equity Classes

A single company can issue more than one class of common stock. This happens most often when founders or insiders want to keep control while raising capital from public investors. The classes usually have identical or similar economic rights (dividends, claims on earnings) but different voting power.

A common structure:

• Class A shares: sold to the public, one vote per share.

• Class B shares: held by founders or insiders, ten votes per share (or another multiple).

Because Class B shares carry more votes per share, a small number of insider shares can control a majority of votes even though public shareholders own most of the economic value of the company. Candidates should recognize this as a deliberate ownership structure, not a market inefficiency.

Voting Rights and Ownership Characteristics

Voting rights determine how shareholders influence corporate decisions, most commonly the election of directors. Two voting structures matter for Level I:

Statutory voting gives each shareholder one vote per share for each director position. A shareholder with 100 shares and three open director seats can cast up to 100 votes for each seat, but cannot combine those votes across seats.

Cumulative voting allows a shareholder to combine all voting rights and cast them for one or a smaller number of directors. The same shareholder with 100 shares and three open seats would have 300 total votes to allocate however they choose, including casting all 300 for a single director.

Cumulative voting increases the influence of minority shareholders because it lets them concentrate votes on candidates who represent their interests, rather than spreading votes evenly across every seat. This is the core exam distinction between the two voting systems.

How Common and Preferred Equity Differ

Common stock offers ownership, control, and unlimited upside, but the lowest priority in a liquidation. Preferred stock offers a more predictable income stream and a higher claim priority, but limited upside and usually no vote. A company can also combine features, for example issuing convertible preferred stock that pays a fixed dividend now but allows a future conversion into common shares if the company performs well.

Worked Example

Meridian Robotics has two classes of common stock outstanding. Class A shares are held by the public and carry one vote per share. Class B shares are held by the founding team and carry five votes per share. There are 8,000,000 Class A shares and 1,000,000 Class B shares outstanding. The company is electing a new board and uses statutory voting.

Step 1: Calculate total votes by class

Step 2: Calculate total votes outstanding

Step 3: Calculate each class's share of total voting power

Even though Class B shareholders own only about 11% of total shares outstanding (1,000,000 of 9,000,000), they control 38.5% of total voting power. This shows why dual-class structures let insiders retain significant influence over board elections without owning a majority of shares.

If the board election used cumulative voting instead of statutory voting, Class B holders could concentrate their votes further, giving them even more influence on a smaller number of contested board seats.

Common Exam Traps

Assuming all equity carries voting rights

Preferred stock usually has no vote. A question describing dividend priority is not automatically describing voting power.

Treating dividend priority and voting power as the same right

Preferred shareholders often get paid before common shareholders, but that priority does not translate into board influence. Keep cash flow rights and control rights separate.

Confusing statutory voting with cumulative voting

Statutory voting limits votes to one per share per seat. Cumulative voting allows pooling votes across seats. Mixing these up leads to the wrong answer on minority shareholder influence questions.

Assuming more shares always means more control

Dual-class structures mean voting power depends on the class of shares held, not just the number of shares. Always check the votes-per-share ratio before calculating control.

Ignoring convertible or callable features when asked about upside or issuer control

These features change the practical risk and return profile of preferred stock, even though the shares still lack standard voting rights.

Practice Question

A company has two classes of common stock. Class A shares carry one vote per share, and Class B shares carry ten votes per share. An investor owns 50,000 Class A shares. A competing shareholder owns 6,000 Class B shares. Assuming no other shares are outstanding, which shareholder controls more votes, and why?

1. The Class A investor, because total votes depend only on the number of shares owned

2. The Class B shareholder, because 6,000 shares at 10 votes per share equals 60,000 votes, more than the Class A investor's 50,000 votes

3. Both shareholders have equal control, because voting rights are always distributed equally across common stock classes

FAQs About Types, Classes, and Voting Rights of Equity Securities