Investing in stocks is gaining more popularity with each passing day. The possibility of earning passive income and capital appreciation are two prominent drivers for stock investments.
From a company’s perspective, issuing stocks in exchange for money gives them unlimited capital without relying on debts. Of the different types of stocks that companies issue, alphabet stock is one of them. In today’s article, let us understand what alphabet stocks mean and how they are different from common stocks.
What are stocks?
Stocks are shares representing a portion of the company, given to investors in exchange for capital. Each share holds rights such as voting powers, dividend-earning potential, ownership in the company, etc.
Investors choose the stock market for investments since they get to participate in the investing company’s management apart from sharing the company’s profits. Besides, stock prices constantly fluctuate in the market, giving investors an opportunity for wealth generation.
The two main categories of stocks are equity or common stock and preferred stocks.
Both of them provide ownership, dividend and voting rights. However, preference shareholders get fixed dividends, unlike equity holders whose dividends depend on the company’s profits. Preference shareholders also get priority over equity holders while paying dividends and during the company’s liquidation.
Equity stocks are further divided into different types based on the rights included and the purpose of the issue. Alphabet stock is a sub-category of common stock.
What are alphabet stocks?
Alphabet stocks are stocks of a subsidiary company. While investing in a parent company is considered a common stock, investing in its subsidiary is called an alphabet stock.
When a parent company takes over a subsidiary, it takes over a certain percentage of ownership and profits of the subsidiary. When the parent company allows the public to invest in such acquired ownership, it is called alphabet stock.
Alphabet stocks may or may not have the same rights as common stocks. The dividends and rights of alphabet stocks depend on the agreement between the parent and the subsidiary company.
It is essential here to understand that every investment in a subsidiary company does not qualify as an alphabet stock. Subsidiary companies operating as independent entities can list themselves on the stock exchange and trade as usual. Investors buying such shares are holders of common stock. It only becomes alphabet stock when investors invest in the shares of the subsidiary that is owned by the parent company.
Alphabet stock examples
To understand the concept of alphabet stocks better, let’s consider two scenarios:
Case 1: Maharashtra Scooters Ltd is a subsidiary of Bajaj Holdings. The two are independently listed on the stock exchange. So, investing in Maharashtra Scooters does not qualify as alphabet stocks.
Case 2: One of the most common examples of alphabet stocks is investing in Alphabet Inc. It is the parent company of Google and has different classes of shares, offering different rights to investors. Such shares are popularly known as Class A, Class B and Class C shares in other countries. In India, such shares are called shares with “differential voting rights” (DVR).
An example of a DVR issue in India was when Tata Motors issued it in 2008. It was the first instance of a DVR issue in India. Tata Motors issued DVRs during the acquisition of Jaguar Land Rover, with each stock having 1/10th of voting rights, unlike common stocks, where each unit represented one vote.
Bottomline
Alphabet stocks are slightly different from common stocks as they come with different rights. They allow investors to invest in subsidiary stocks held by the parent company.
While investing in alphabet stocks limits voting rights, some DVRs may provide discounts and higher dividends to compensate for the same. So, it can be an ideal investment option for those wanting to increase their passive income while having limited ownership.
FAQs
No, Class A shares are usually valued higher since they come with more rights as compared to Class B shares.
Google has two stocks with two symbols GOOG and GOOGL. The objective behind this was to raise additional capital without diluting power. While GOOGL offers voting rights, GOOG offers no voting rights to investors.
It depends on the investment objective of the investor. If the aim is to earn additional income in the form of dividends and buy stocks at a discount, DVR is a good option. However, investors must be ready to compromise on their participation in the company’s management. DVR is not the right option for investors looking to participate actively in the company’s decisions.
Normal shares or ordinary shares have more voting rights as compared to DVRs. DVRs on the other hand, usually receive higher dividends and are issued at a discount to investors.
Companies issue DVRs when they want to raise additional capital through stocks and not debt, but without diluting more ownership. Some companies prefer paying additional dividends to retain the ownership and management with existing shareholders, without further dilution. DVRs are ideal in such cases.
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