What Is Control Stock?
Control stock refers to equity shares owned by major shareholders of a publicly traded company. These shareholders will have either a majority of the shares outstanding or a portion of the shares that is significant enough to allow them to exert a controlling influence on the decisions made by the company. When companies have more than one class of common shares, shares with superior voting power or vote weighting are considered to be control stocks, relative to the inferior class of voting rights shares.
Key Takeaways
- Control stock gives control to the stockholder when larger and important decisions are being made.
- Shares with superior voting power, or vote weighting, are considered to be control stock.
- Control stock refers to equity shares owned by major shareholders of a publicly traded company.
- Common stock is a form of corporate equity ownership entitling the holder to dividends that vary in amount.
- Many companies only issue one type of common stock; however, multiple companies issue two or more classes of common stock.
How Control Stock Works
Stock control, also known as inventory control, manages how much product a company has on hand. However, stock control also manages how much stock a certain shareholder or group of shareholders own.
Shareholders who control a majority of a company's shares effectively have enough voting power to dictate the firm's decisions. As such, their shares can be referred to as control stock. A party can achieve this status as long as the ownership stake is proportionately significant compared to voting stock.
There are methods that the company and investors proactively use known as inventory control to show how much stock someone has at a specific point in time.
Special Considerations
Many owners will always keep at least 51% of the company. They will only sell 49% of the company. By doing this, they will remain the majority holder and make the final decisions. Even if someone else owned 49.9%, the one owning 50.1% is the majority holder making it possible for them to make the final decision.
They may not keep exactly 51%, but odds are they will make sure that they are going to be the largest shareholder to keep the decisions in their hands. A shareholder can buy almost all the shares and become the main shareholder, giving them the decision right.
Benefits of Control Stock
Many investors would like to be able to make crucial decisions for a company. One method of being able to have such control is by owning control stock. This requires money to be available to purchase such stock.
A rather beneficial reason to have control stock is being paid. The owner will be able to make important decisions to help the company grow and become more profitable, in turn increasing stock price. It is even better for the investor if the company offers dividends with its stock. Owning a lot of stock that pays dividends can increase the income of the investor immensely. The dividends can be used however the owner wants, but it is another source of income to throw around or even reinvest.
Example of Control Stock
For example, suppose XYZ Corp. had two classes of common stock, Class A and Class B. Both types of these shares carry an equal claim to the firm's assets. In other words, if the firm has 100 common shares in total, 50 are Class A shares and 50 are Class B shares.
Let's assume that the B shares entitle the shareholder to one vote, but the A shares entitle the shareholder to 10 votes. If you owned one Class A share, you would own 1% of the company's assets, but wield 10 votes at company meetings. Meanwhile, an investor who owned one Class B share would have the same 1% claim to the firm's assets, but only be able to cast one vote at company meetings.
In this example, the Class A stock is a control stock compared to the Class B stock, since it holds significantly more voting power.
