Control Stock: An Overview

The control stock definition states that they are equity shares owned by major shareholders of a publicly-traded company. This article covers what control stock is, how it works, and other considerations around it.

What is control stock?

Control stock is shares held and owned by major shareholders of a public company. These shareholders will hold a majority of the outstanding shares. Alternatively, they may hold a significant portion of the shares, sufficient enough to exert a controlling influence over the company's decisions. Many companies only issue one type of common stock. However, if a company issues more than one class of common stock, shares with higher voting rights or weightage are considered as control stock. This is in contrast to shares with lower voting rights.

How does control stock work?

Shareholders who control the majority of the company's shares, have, in effect, sufficient voting rights to make decisions about, and for the company. For this reason, their shares are referred to as control stock. Parties can achieve this status as long as their ownership in shares is relatively significant compared to voting stock.

As a general rule, company owners will retain at least 51% of the business. They will sell 49% (or less) of the business. In doing so, they will hold a majority and will consequently, make the final decisions.

They may not always retain exactly 51%, but they will most likely ensure that they are the largest shareholder holding the decisions in their hands. Even if one owns 49.9%, the one who owns 50.1% is the majority owner taking the final calls. A shareholder can even buy almost all the shares and become the main shareholder, preserving decision-making power.

Example of control stock

Super Corp. had two classes of common stock, class X and class Y. Both these types of shares carry an equal claim to the company’s assets. To put it in numbers, if the company has 100 common shares in total, 50 are class X shares and 50 are class Y shares.

Assume that Y shares grant the shareholder one vote, and X shares grant the shareholder 10 votes. If you, as a shareholder, own one class X share, you essentially own 1% of the company's assets but receive 10 votes at company meetings. At the same time, an investor who owns one class Y share will have the same 1% rights to the company's assets, but can only cast one vote at company meetings.

In this example, class X stock is a control stock compared to class Y stock since it holds more voting rights.

Benefits of a control stock

Many investors would like to be in a position to make important decisions for the company. One way to do this is through ownership of control stock. Additionally, the purchase of such control stock naturally warrants the availability of money.

One favourable cause to hold control stock is rather straightforward — being paid. Control stock owners can take important decisions that help the company grow and improve profitability. The enhanced performance will eventually result in higher stock prices. This way, shareholders experience a capital gain on the value of their assets i.e., the shares they hold.

An additional advantage is in the form of dividends from the company’s stock. Owning considerable chunks of stock that pay high dividends can significantly increase an investor's income. Such dividends can be used at the owner's discretion.

Inventory control vs control stock

Control stock is often confused with stock control. However, these are two different financial terms with different meanings.

Inventory control, also called stock control, is the process of managing a company's inventory levels, whether in its warehouse or over multiple locations. This includes managing products from the moment they are in stock (raw material) to their final form (finished goods), final destination (sale to the customer), or disposal.

However, control stock refers to equity shares held by major shareholders of a publicly-traded company. These shareholders command the larger, more important decisions of the company.