What Is Alphabet Stock?

An alphabet stock refers to a separate class of common stock that is tied to a specific subsidiary of a corporation. More broadly, it refers to shares of common stock that are distinguished in some way from other common stock of the same company.

It is called an alphabet stock because the classification system used to identify each class of common stock uses letters to distinguish it from the parent company’s stock. Alphabet stock may have different voting rights from the parent company’s stock.

Understanding Alphabet Stock

Publicly traded companies may issue alphabet stock when purchasing a business unit from another company. This unit becomes a subsidiary of the acquirer, and holders of the alphabet stock are only entitled to the earnings, dividends, and rights of the subsidiary, not the entire acquirer. A similar situation would be the issuance of tracking stock, where a firm issues a subclass of shares on an existing subsidiary.

Alternatively, like with all stock issuance, a firm may issue a new class of common stock to raise capital. However, this new asset class of stock may have limited voting rights, allowing insiders and management to maintain control of the firm.

Alphabet shares may be indicative of a complex capital structure. Companies with complex capital structures and several subsidiaries and divisions may have a combination of several different varieties of common stock classes, with each share class carrying different voting rights and dividend rates.

Special Considerations

When alphabet stock is issued, typical nomenclature is to see a period and letter behind the existing stock symbol, indicating a separate share class. So, for example, if ABC company, whose stock symbol is ABC, issued Class A and B shares, the new ticker for these shares would be ABC.A. and ABC.B., respectively.

There is no standard format for alphabet stock in terms of which share class has more voting rights if voting rights differ among them. Typically, Class A shares would have more rights than Class B, and so forth, but it is important to read the details about share classes before investing. To learn more about the issuance of multiple share classes by a firm, check out related writing on the topic.

What Is Annualized Total Return?

An annualized total return is the geometric average amount of money earned by an investment each year over a given time period. The annualized return formula is calculated as a geometric average to show what an investor would earn over a period of time if the annual return was compounded.

An annualized total return provides only a snapshot of an investment’s performance and does not give investors any indication of its volatility or price fluctuations.

Understanding Annualized Total Return

To understand annualized total return, we’ll compare the hypothetical performances of two mutual funds. Below is the annualized rate of return over a five-year period for the two funds:

• Mutual Fund A Returns: 3%, 7%, 5%, 12%, and 1%
• Mutual Fund B Returns: 4%, 6%, 5%, 6%, and 6.7%

Both mutual funds have an annualized rate of return of 5.5%, but Mutual Fund A is much more volatile. Its standard deviation is 4.2%, while Mutual Fund B’s standard deviation is only 1%. Even when analyzing an investment’s annualized return, it is important to review risk statistics.

Annualized Return Formula and Calculation

The formula to calculate annualized rate of return needs only two variables: the returns for a given period of time and the time the investment was held. The formula is:


$\begin{aligned} \text{Annualized Return} = &\big ( (1 + r_1 ) \times (1 + r_2) \times (1 + r_3) \times \\ &\dots \times (1 + r_n) \big ) ^ \frac{1}{n} – 1 \\ \end{aligned}$Annualized Return=​((1+r1​)×(1+r2​)×(1+r3​)×⋯×(1+rn​))n1​−1​

For example, take the annual rates of returns of Mutual Fund A above. An analyst substitutes each of the “r” variables with the appropriate return, and “n” with the number of years the investment was held. In this case, five years. The annualized return of Mutual Fund A is calculated as:


$\begin{aligned} \text{Annualized Return} &= \big ( (1 + .03) \times (1 + .07) \times (1 + .05) \times \\ &\quad \quad (1 + .12) \times (1 + .01) \big ) ^ \frac{1}{5} -1 \\ &= 1.309 ^ {0.20} – 1 \\ &= 1.0553 – 1 \\ &= .0553, \text{or } 5.53\% \\ \end{aligned}$Annualized Return​=((1+.03)×(1+.07)×(1+.05)×(1+.12)×(1+.01))51​−1=1.3090.20−1=1.0553−1=.0553,or 5.53%​

An annualized return does not have to be limited to yearly returns. If an investor has a cumulative return for a given period, even if it is a specific number of days, an annualized performance figure can be calculated; however, the annual return formula must be slightly adjusted to:


$\begin{aligned} &\text{Annualized Return} = ( 1 + \text{Cumulative Return} ) ^ \frac {365}{ \text{Days Held} } – 1 \\ \end{aligned}$​Annualized Return=(1+Cumulative Return)Days Held365​−1​

For example, assume a mutual fund was held by an investor for 575 days and earned a cumulative return of 23.74%. The annualized rate of return would be:


$\begin{aligned} \text{Annualized Return} &= ( 1 + .2374) ^ \frac{365}{575} – 1 \\ &= 1.145 – 1 \\ &= .145, \text{or } 14.5\% \\ \end{aligned}$Annualized Return​=(1+.2374)575365​−1=1.145−1=.145,or 14.5%​

Difference Between Annualized Return and Average Return

Calculations of simple averages only work when numbers are independent of each other. The annualized return is used because the amount of investment lost or gained in a given year is interdependent with the amount from the other years under consideration because of compounding.

For example, if a mutual fund manager loses half of her client’s money, she has to make a 100% return to break even. Using the more accurate annualized return also gives a clearer picture when comparing various mutual funds or the return of stocks that have traded over different time periods. 

Reporting Annualized Return

According to the Global Investment Performance Standards (GIPS)—a set of standardized, industry-wide principles that guide the ethics of performance reporting—any investment that does not have a track record of at least 365 days cannot “ratchet up” its performance to be annualized.

Thus, if a fund has been operating for only six months and earned 5%, it is not allowed to say its annualized performance is approximately 10% since that is predicting future performance instead of stating facts from the past. In other words, calculating an annualized rate of return must be based on historical numbers.

The Bottom Line

Annualized total return represents the geometric average amount that an investment has earned each year over a specific period. By calculating a geometric average, the annualized total return formula accounts for compounding when depicting the yearly earnings that the investment would generate over the holding period. While the metric provides a useful snapshot of an investment’s performance, it does not reveal volatility and price fluctuations.