Last Updated on Feb 22, 2022 by Ayushi Mishra
In the investment space, you often come across two terms, ‘Stocks’ and ‘Shares.’ These are the primary basic terms that investors should understand before embarking on their stock market investment journey. Even though these are two different terms, they are often used interchangeably. People often do not notice the difference between a share and a stock.
These terms denote the same thing to a certain extent, i.e., they refer to the percentage/part of an investor’s ownership in a public company.
To better understand the meaning of the terms and the areas of differences, let us focus on the primary and core essentials.
The article covers:
- What is the meaning of a ‘stock’?
- What is the meaning of a ‘share’?
- Key Differences – Stock vs Shares
- What are the types of stock?
- What are the types of shares?
Table of Contents
What is the meaning of a ‘stock’?
- Stocks represent part-ownership of financial securities in one or more companies.
- When an investor buys a company’s stock, they become a shareholder.
- The proof of the ownership is known as the stock certificate and provides the details of the total number of stocks the investor holds.
- Since there is no limit to the number of stocks one can hold in one’s portfolio, investors can buy stocks of one or several companies.
- Investors are inclined towards investing in stocks of companies that have a probability of increasing in value.
- If all goes well and there’s an appreciation in stock value, the investor can sell their portion and earn a profit on the same.
- Since there is a part-ownership factor involved, the stockholder can receive a part of the company’s profit.
- This share of profit is shared with the stockholders through annual, quarterly, or monthly dividend payments.
- Hence this form of investment is quite lucrative as it also helps reduce the market inflation impact over a stipulated period.
What is the meaning of a ‘share’?
- In simple terms, ‘Share’ is the smallest unit as a part of a company’s total stock.
- Assuming a person S owns ‘200 shares of XYZ Inc.’ If XYZ Inc. has two lakh shares, it means S owns 0.1% of the entity.
- To be classified as a principal stockholder, any person or entity must hold 10% ownership in a company, irrespective of how many shares they hold.
- Investors buying shares are entitled to earn interest on the capital invested along with dividends.
- The investment made by the investors, in total, helps to push up the company’s value, thereby leading to a hike in individual share price.
- The shareholders then aim to sell the shares for a higher value than their actual purchase price to profit from their investment.
Key Differences – Stock vs Shares
The following are some of the essential points of difference between stock and share:
Ownership
Shares owned by investors in multiple companies are collectively known as owning stocks. If the same practice of holding shares is in one company, the investor is the owner of shares.
Denomination
Investors looking to own stocks have the privilege of choosing from a pool of stocks having different values. On the other hand, investors who own shares in only a specific company have the option to own multiple shares. But the shares held by them would be of the same or equal value.
Paid-up value
In terms of nature, stocks are fully paid up. Shares could, however, be either partly or wholly paid up.
Nominal value
It refers to voting rights stockholders share when the stock is issued. It varies from the market value, depending on the demand for and supply of the shares.
What are the types of stock?
Common stock
Common stockholders have the right to vote at the AGMs/shareholders’ meetings. Common stockholders have a directive hold, and they also receive company dividends at regular intervals.
Preferred stock
Preferred stockholders do not have the voting rights that the common stockholders enjoy. The benefit they have is that they are preferred when the company declares the dividend pay-outs. If the company happens to go bankrupt, the dues of the preferred stockholders are to be disposed of first in comparison to common stockholders.
These stocks come under the following categories:
Growth stocks – Growth at a faster rate than the usual market average is promised by these stocks. Dividends are rarely offered under this category; hence capital appreciation is expected.
Income stocks – Regular dividend pay-outs are promised by Income stocks as they help the investor to build a regular income.
What are the types of shares?
The companies are at their own discretion when it comes to issuing shares. It could be based on the features and rights offered. The following are the widely-known types of shares:
Common shares
This type of share is the most basic one that can be further classified into several categories per voting rights. For example, let us assume there are two classes of common shares – Class X and Class Y. It may be so that Class X common shares may have one voting right per share. But Class Y shares might be allowed five voting rights per share.
Preference shares
Preference shares function like bonds and are not very popular among investors. They do enjoy priority claims on the assets in case of doubts. The dividend payments of this type are guaranteed.
Takeaway
Investors may find that the difference between stock and shares may not be significant. It is essential to understand the basics and get into the depth of the subject before foraying into the stock market. After you have a knowledge-backed investment strategy in place, you can plan your way ahead, start investing in individual shares, and eventually build a decent portfolio of stocks. The key to growth is having as diverse a portfolio as possible and regularly monitoring the short- and long-term stock selection.
