A share is a financial instrument that companies issue to shareholders to grant them part-ownership. These instruments allow companies to raise equity finance to fund operations.
In exchange, shareholders become part-owners in a company’s operations. Companies may use several sources to transfer this ownership to the shareholders. Usually, they use a market through which they issue shares.
The most common types of shares that companies may issue include common stock. This stock comes with all the relevant features with a company’s ownership.
However, there are many classes and types of shares that companies may issue. These shares differ based on various factors, such as markets, preferences, ownership, dividends, etc. One of these shares includes A-shares. This term may either refer to Class A shares or Chinese A-shares.
What are A-Shares?
The term A-shares may refer to class A shares that come from the classification of common stock. Traditionally, this classification existed to differentiate between various shares based on the voting rights they carried.
Class A shares included more voting rights than class B shares. However, there is no requirement for companies to issue a specific type of share.
A-shares may also refer to a type of multi-class mutual fund. These shares cater to the needs of retail investors rather than others.
Other types of these mutual funds may include Class B or Class C funds. A-shares usually don’t have a back-end load when getting sold. These classes also differ from each other due to the fee structures used.
One of the primary characteristics of A-shares is the existence of a front-end load fee structure. When trading, portfolio managers deduct a commission upfront.
Therefore, the total amount invested in the mutual fund will equal the initial investment amount less the commission. A-shares differ from B-shares that come with a back-end load. For B-shares, the entire initial investment amount gets invested into the mutual funds share.
A-shares allow investors to pay commission upfront. Through this process, they may have to pay higher fees initially. It also means they must have a higher yield on their investment to get a positive return on the investment.
However, it also allows them to enjoy all the profits once the investment is ready to sell. Therefore, some investors may prefer A-shares due to this feature.
Overall, A-shares may refer to Class A shares that companies may distribute. These shares come with specific benefits that investors prefer over Class B shares.
In some cases, it also refers to multi-class mutual funds that include Class A shares. One of the primary characteristics of A-shares is front-end load. In some cases, the term A-shares can also refer to Chinese A-shares distributed by companies.
What are Chinese A-Shares?
A-shares is also a term used to describe Chinese shares of an incorporated company operating in mainland China. These companies usually include corporations listed on the Shanghai or Shenzhen stock exchanges.
A-shares have various restrictions placed upon by the Chinese government. For example, these shares are only available for trading to citizens of mainland China.
However, that does not imply the unavailability of investment options for foreign investors for these companies. Foreign institutions can purchase shares in these companies through the Qualified Foreign Institutional Investor (QFII) system. This process began in 2003, after which the Chinese government allowed foreign institutions to invest in A-shares companies.
Another characteristic of A-shares is their use of Chinese renminbi (RMB) for valuation. It differs from most other shares that get evaluated using United States Dollars (USD).
It is also the reason why these shares are known as domestic shares. Chinese companies also have B-shares that use a USD based valuation rather than the RMB one used by A-shares.
Traditionally, A-shares have been challenging to obtain for foreign investors. However, stock exchange regulators continue to make efforts to allow these shares to be more broadly available.
Investors can also get these shares in common or preferred stock variants. They are top share classifications that exist among Class A, B and C shares.
Overall, A-shares refers to a Chinese stock that gets traded in mainland China. These shares are not available to foreign investors. However, foreign institutions can invest in them through the QFII program.
These shares became common in 1990 and went through a substantial reform in 2002. However, the value and demand for these shares have grown with the growth in the Chinese economy.
How do Chinese A-Shares work?
Companies usually trade their shares through a single market. For most public companies, it will include the stock market of their local jurisdiction. For private companies, there may be a private market for investors to get shares.
Most of these markets allow a straightforward transfer of these shares to the shareholder. Similarly, there are minimal restrictions on how these shares get traded in the market.
However, Chinese stock markets have several restrictions on the shares that get traded by shareholders. Therefore, it becomes more crucial to differentiate between these shares from others.
One of these shares includes the A-shares, also known as domestic shares. These shares use an RMB valuation and get traded in the Shanghai and Shenzhen stock exchanges.
Chinese A-shares differ from other A-shares, also known as Class A shares. Due to the restrictions imposed by the Chinese government, these shares get traded on specific markets.
Similarly, these shares are not available to foreign investments directly. Instead, investors have to participate in a program to get access to these shares.
Traditionally, Chinese A-shares were only available to the citizens of mainland China. These shares also got their value in the Chinese RMB.
For this feature, Chinese A-shares were also known as domestic shares. Some of the characteristics of Chinese A-shares are still in place. However, they are no longer available to the citizens of mainland China.
How do A-Shares differ from other share classifications?
Several characteristics make the A-shares different from other shares. As mentioned, one of the most crucial of these includes a front-end load. These shares come with an initial commission cost. These costs drive investors’ initial expenses higher and require higher returns on the investment. However, these also allow investors to collect all profits without having to incur a commission expense.
In this regard, A-shares differs from B-shares, which have a back-end load. These shares allow investors to invest their full amount into mutual fund shares without commission.
However, they get charged once the shares are ready to sell. Lastly, A-shares also differ from C-shares, which have a level-load fee structure. These shares come with annual commissions.
As mentioned, the term A-shares may also refer to Chinese stocks traded on the Shanghai or Shenzhen stock exchanges. These shares also differ from other share classifications.
Usually, A-shares include shares for Chinese companies. These are different from B-shares, which also consist of incorporated Chinese companies. However, these do not get evaluated in Chinese RMB. Instead, they receive their value in USD.
Another common share classification in China is H-shares, which represent the stock of publicly-traded companies. However, these are only company stocks listed on the Hong Kong stock exchange.
Due to the jurisdiction regulations, these shares fall under Chinese law. However, the companies usually use Hong Kong accounting regulations. Similarly, H-shares receive their valuation in Hong Kong Dollars.
Conclusion
Several share classifications may exist based on various factors. One of thee includes A-shares which may refer to two types of shares. Firstly, A-shares may represent multi-class mutual funds that come with a front-end load. Similarly, the term A-shares also refers to Chinese A-shares, which include stocks of incorporated Chinese companies.
