When it comes to investing in Berkshire Hathaway, the multinational conglomerate headed by Warren Buffett, investors have two options: BRK.A (Berkshire Hathaway Inc Class A) or BRK.B (Berkshire Hathaway Inc Class B) stock.
While the two types of shares represent ownership in the same company, there are some key differences that investors should be aware of before deciding which one to buy.
Price and Liquidity
The most obvious difference between BRK.A and BRK.B stock is their price.
BRK.A stock trades at a six-figure per share total, making it one of the most expensive stocks on the market globally.
In contrast, BRK.B stock is usually priced at around a few hundred dollars per share, making it a more affordable option for individual investors.
Another important difference between the two types of shares is their liquidity.
While both BRK.A and BRK.B stock are relatively illiquid compared to other stocks, BRK.A is significantly less liquid than BRK.B.
This is because there are far fewer shares of BRK.A available, and they are largely held by institutional investors, making them more difficult for individual investors to buy and sell.
Institutions may also prefer the Berkshire Class B shares because of their better liquidity.
Another key difference between BRK.A and BRK.B stock is their voting rights.
Each share of BRK.A stock carries one vote, while each share of BRK.B stock carries 1/10,000th of a vote.
This means that shareholders of BRK.A stock have significantly more voting power than shareholders of BRK.B stock.
This difference in voting rights is largely due to the fact that BRK.B stock was created as a way for Berkshire Hathaway to issue new shares without diluting the voting power of Class A shareholders while also picking up a more diversified shareholder base (e.g., smaller institutions and retail).
By creating a second class of shares with lower voting rights, Berkshire Hathaway was able to issue new shares while still maintaining control of the company.
When Berkshire Hathaway decided to issue Class B shares
While many companies pay regular dividends to their shareholders, Berkshire Hathaway does not to either the Class A or Class B shareholders.
Instead, the company reinvests its profits back into the business through share buybacks or uses them to acquire new companies.
This means that investors who buy shares of Berkshire Hathaway should not expect their shares to return them capital in the form of dividends.
However, this can be seen as a positive by some investors who prefer to see their money reinvested in the company, potentially leading to long-term growth in the value of their shares.
There is also the tax treatment of dividends vs. share buybacks.
Each jurisdiction’s tax laws are different, but dividends taxed at normal income tax rates may be higher than the long-term capital gains rates associated with share buybacks (because buybacks lower the number of shares outstanding, increasing the price of the stock, holding all else equal).
The Net Investment Income Tax (NIIT) is a 3.8% tax levied on the investment income of certain individuals, estates, and trusts that have a modified adjusted gross income (MAGI) above specified thresholds.
The NIIT was established as part of the Affordable Care Act (ACA) in 2013 and is applied to dividends, capital gains, and other investment-related income.
The tax implications for Berkshire Hathaway’s Class A and Class B stocks can be different due to the varying price points and the investor profiles attracted by each class.
As mentioned above, Berkshire Hathaway Class A shares are known for their high price and exclusivity, as they are some of the most expensive shares traded on public markets globally.
As a result, the individuals who can afford to invest in these shares tend to have a high net worth and high income levels.
This means that they are more likely to have a MAGI above the thresholds for the NIIT.
Accordingly, these investors are more susceptible to the additional 3.8% tax on any investment income from BRK.A shares.
On the other hand, Berkshire Hathaway’s Class B shares (BRK.B) are priced at a much lower level, making them more accessible to a broader range of investors, including those with lower income levels.
As a result, the investors in BRK.B shares are less likely to have MAGI that exceed the NIIT thresholds, reducing the likelihood that their investment income from these shares will be subject to the tax.
The investor profile of BRK.B shareholders typically consists of more middle-class individuals and small-scale investors who may be investing for long-term wealth accumulation, retirement, or other financial goals.
Which is Right for You?
The decision of whether to invest in BRK.A or BRK.B stock will depend on a variety of factors, including your investment goals, risk tolerance, and access to capital.
If you are a long-term investor who is looking to invest in Berkshire Hathaway for its potential for long-term growth, then either type of share may be suitable.
Class B best for smaller investors
However, if you are an individual investor who is looking for a more affordable option with greater liquidity, then BRK.B stock will more practically be the better choice.
Class A best for voting power
If having a larger voting power is important to you, then BRK.A stock may be the better choice.
(Buying 10,000 Class B shares to match the voting power of each Class A share doesn’t make sense because, pound-for-pound, the Class B share is more expensive when it comes to voting power.
For example, let’s say each Class B share is trading at $300 and each Class A share is trading at $450,000.
If you buy 10,000 Class B shares, that’s $3 million worth of BRK.B to get the same voting power as the single share of BRK.A that cost $450,000.)
Class A has beat out Class B returns historically
Another important factor to consider is the historical performance of each type of share.
While past performance is not a guarantee of future results, it can be helpful in understanding how each type of share has performed over time.
Historically, BRK.A stock has outperformed BRK.B stock, which may have to do with the value of its voting power creating greater demand.
Since both began trading simultaneously in May 1996, the Class A shares have performed better overall by about 0.08% on an annualized basis.
However, this may not be a reliable indicator of future performance.
FAQs – Berkshire Hathaway A Shares vs. B Shares
What is the difference between BRK.A and BRK.B stock?
The main differences between BRK.A and BRK.B stock are price, liquidity, tax implications, and voting rights.
BRK.A stock is priced at hundreds of thousands of dollars per share and is less liquid, while BRK.B stock is priced at several hundred dollars per share and is more accessible to individual investors.
BRK.A stock also carries greater voting power, while BRK.B stock carries 1/10,000th of a vote.
Additionally, BRK.A stock may be subject to the net investment income tax (NIIT), while BRK.B stock is less likely to be subject to this tax.
Can individual investors buy BRK.A stock?
Yes, individual investors can buy BRK.A stock.
However, due to its high price and low liquidity, it may be more difficult for individual investors to buy and sell shares of BRK.A than it is for institutional investors.
Does Berkshire Hathaway pay dividends to shareholders?
No, Berkshire Hathaway does not pay regular dividends to shareholders.
Instead, the company reinvests its profits back into the business or uses them to buy new companies.
Berkshire Hathaway is also known for keeping around large cash piles to potentially buy assets cheaply.
Which type of share has historically performed better, BRK.A or BRK.B?
Historically, BRK.A stock has outperformed BRK.B stock, which may be due to its greater voting power pound-for-pound.
However, past performance is not a guarantee of future results.
What should I consider before deciding to invest in BRK.A or BRK.B stock?
Before deciding to invest in BRK.A or BRK.B stock, you should consider your investment goals, risk tolerance, and tax situation.
How do I buy shares of BRK.A or BRK.B stock?
Shares of BRK.A and BRK.B stock can be purchased through a brokerage account or an online trading platform.
It’s important to research and compare different brokers and platforms to find one that meets your needs and offers low fees.
While both BRK.A and BRK.B stock represent ownership in the same company, there are some key differences that investors should be aware of before investing.
BRK.A stock is more expensive and less liquid, but carries greater voting power, while BRK.B stock is more affordable and more accessible to individual investors.
Overall, the decision of which type of share to invest in will depend on a variety of factors, and investors will need to carefully consider their options and/or get in contact with a qualified financial professional before making any investment decisions.