CFA Level I Exam · Equity Jurisdictions, Classes, and the Voting Process

Classes of Equity Shares: Common, Preferred and Dual Class

Updated 7 October 2026 · Fact-checked

Classes of equity shares are groups of a company's shares that carry different rights. Common shares have voting rights and residual claims. Preferred shares usually pay fixed dividends and rank ahead of common in dividends and liquidation, but often lack votes. Differential voting shares give some holders more or fewer votes per share. Compare rights, dividends and claims.

Understand Classes of Equity Shares

A company can issue more than one class of equity. Each class is a separate set of shares with its own rights. The rights that differ most are voting, dividends and the claim on assets if the company is wound up.

Common shares are the basic ownership claim. Holders are residual claimants: they are paid only after creditors and preferred shareholders. Dividends are not promised, so the board can raise, cut or skip them. In return, common holders get the upside if the company does well. They usually vote on directors and major matters.

Preferred shares sit between debt and common equity. They usually pay a stated dividend, often a fixed rate or fixed amount per share. They rank ahead of common for dividends and in liquidation, but behind debt. Most preferred shares have no voting rights, or only limited ones, such as when dividends are missed. Their price tends to move with interest rates more than common shares do, and they have limited upside.

Preferred shares come in several types. Cumulative preferred means missed dividends build up as arrears and must be paid before any common dividend. Non-cumulative means missed dividends are lost. Participating preferred can receive extra dividends above the stated rate under set conditions. Non-participating gets only the stated rate. Convertible preferred can be exchanged for common shares. Callable preferred lets the issuer redeem it. Putable preferred lets the holder sell it back to the issuer.

Companies may also issue common shares with differential voting rights. In a dual class structure, one class (often held by founders) gets more votes per share, for example 10 votes, while another class gets one vote or none. Economic rights, such as dividends per share, are often similar, but control is not. This lets insiders keep control with a small economic stake. Investors worry about weaker accountability, so they look hard at these structures. Classes may also be labelled by issue date or by holder type (for example Class A and Class B), so always read the actual rights.

Key formulas to remember

Order of claim in liquidation: Creditors (debt) > Preferred shares > Common shares; Common shareholders are residual claimants and are paid last.
Cumulative preferred dividend owed: Dividend owed = unpaid prior dividends (arrears) + current-year dividend, less any partial payments; Applies to cumulative preferred only. Arrears must be paid before any common dividend. If no dividends were paid for the missed years, arrears = years missed × stated dividend per share.
Votes of a class: Total votes = shares held × votes per share; Use this to compare voting control with economic ownership in dual class structures.
Voting power share: Voting power % = holder's votes ÷ total votes of all classes; Can differ greatly from the percentage of economic ownership.
Fixed preferred dividend: Dividend per share = dividend rate × par value; Used when the preferred dividend is stated as a rate on par.

How to solve Classes of Equity Shares questions

Use this method for any question on share classes, whether it is conceptual or numerical.

1Identify each class in the stem and note the rights given: votes, dividend terms and liquidation rank.
2Decide whether the question asks about voting control, dividends or claim on assets. These are separate issues.
3For preferred shares, check the features: cumulative or non-cumulative, participating or not, convertible, callable, putable.
4For numbers, compute dividends or votes per class first, using shares × rate or shares × votes per share.
5For control questions, compute each holder's votes as a percentage of total votes, not of total shares.
6Apply the ranking: creditors, then preferred, then common, in dividends and liquidation where relevant.
7Eliminate the two wrong options by checking each against a stated right or a feature definition.
8Re-read the stem for words such as arrears, per share or total before choosing.

Quickest way: Feature-matching shortcut

When to use it: Use for definition and comparison questions where you have about 90 seconds.

Underline the one feature the stem tests: votes, dividend or claim.
Recall the default: common = votes, residual, variable dividend; preferred = fixed dividend, senior, usually no votes.
Look for the modifier word: cumulative, participating, convertible, callable, putable.
Drop any option that contradicts the default or the modifier, then pick the remaining one.

Common mistakes in Classes of Equity Shares

Assuming preferred shareholders always have voting rights.
Students link ownership with votes.
Fix: Remember that preferred shares usually have no or limited votes, often only if dividends are missed.
Treating preferred dividends as a legal obligation like interest.
The dividend is fixed, so it looks like debt.
Fix: Dividends are paid only if declared by the board. Cumulative features create arrears that rank before common dividends, but they are not debt.
Confusing cumulative with participating.
Both words describe extra dividend rights.
Fix: Cumulative covers missed past dividends. Participating covers extra dividends above the stated rate.
Measuring control by share count instead of votes in dual class firms.
Students forget votes per share differ.
Fix: Multiply shares by votes per share for each class, then divide by total votes.
Mixing callable and putable.
The names sound alike.
Fix: Callable: issuer can redeem. Putable: holder can sell back to the issuer.
Placing preferred shares ahead of debt or behind common.
Students mix up the order of claims because preferred shares look like a mix of debt and equity.
Fix: In liquidation, creditors are paid first, then preferred, then common. Interest on debt is paid before any dividends.

Worked examples

Example 1

A company has 2,000,000 Class A shares with 10 votes each, held by founders, and 8,000,000 Class B shares with 1 vote each, held by the public. What percentage of total votes do the founders control, to the nearest whole percent? A) 20% B) 71% C) 80%

Show the solution

Founders' votes = 2,000,000 × 10 = 20,000,000.
Public votes = 8,000,000 × 1 = 8,000,000.
Total votes = 20,000,000 + 8,000,000 = 28,000,000.
Founders' share = 20,000,000 ÷ 28,000,000 = 0.714, or 71%.
Their economic stake is 2,000,000 ÷ 10,000,000 = 20%, so option A is the share-count trap. Option C is the public's share of shares (80%), which is not the founders' voting power.

Answer: B) 71%

Example 2

An investor holds 1,000 shares of cumulative preferred stock with a par value of $50 and a 6% dividend rate. The company paid no dividend last year and nothing this year so far. It now wants to pay a common dividend. What must be paid to the preferred holder first? A) $3,000 B) $6,000 C) $9,000

Show the solution

Annual dividend per share = 6% × $50 = $3.
Annual dividend for 1,000 shares = 1,000 × $3 = $3,000.
Cumulative preferred: last year's missed dividend is in arrears, plus this year's dividend.
Total owed = $3,000 + $3,000 = $6,000.
Option A ignores arrears. Option C counts three years, which the stem does not support.

Answer: B) $6,000

Exam tips

Questions often test one feature in a short stem. Spot the key word, such as cumulative or callable, before reading the options.
In dual class questions, always compute votes, not shares, and watch for the trap option that equals the economic ownership.
Preferred ranks ahead of common but behind debt. Use this to eliminate options that reverse the order.
Numerical options are listed smallest to largest, so check whether an extreme option comes from ignoring arrears or using the wrong base.
With no penalty for wrong answers, never leave a question blank. Narrow to two options and choose.

Practice questions from Equity Jurisdictions, Classes, and the Voting Process

Classes of Equity Shares in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Classes of Equity Shares: frequently asked questions

What is the difference between common and preferred shares?

Common shares carry votes and residual claims, with variable dividends. Preferred shares usually pay a fixed dividend and rank ahead of common, but often have no votes. Preferred has limited upside, while common has more.

What are differential voting rights shares?

They are shares of the same company that carry different numbers of votes per share. For example, one class may have 10 votes and another 1 vote. This separates control from economic ownership.

What is a dual class share structure?

It is a structure with two classes of common shares that have different voting power. Founders or insiders often hold the higher-vote class. Investors may view it as a governance risk because insiders can keep control with a smaller stake.

What does cumulative preferred mean?

It means unpaid dividends build up as arrears. The company must pay all arrears before it can pay any dividend to common shareholders. Non-cumulative preferred loses missed dividends.