Before you start online stock trading, it is important to know the difference between stocks and shares. "Stock" and "Share" are individual terms that have their own importance and they’re a lot more different than it seem. First, let us begin by defining the two so we have a clear understanding.
Shares
A share depicts a part of a company's stock. Stocks are further divided into shares and every share market of stock is the equivalent of a certain portion of a company’s ownership. Let us understand this with an example. Say company X has 1 lakh shares in total. Out of these, an individual holds 100 shares, which means that this person is the owner of stock that equals 0.1% of X’s total stocks.
Trading stocks would not be possible if one could not measure ownership interest besides in terms of the dollars invested. Shares play an important role here. Investors can get a fair picture of the size of their ownership in the company when on the overall percentage of the shares they own.
You will come across many different types of shares.
- Ordinary shares: Ordinary shares are the same as common stock.
- Cumulative preferred shares: Investors prefer these stocks as they call for payment of missed dividends.
- Deferred shares: There are no rights to assets in these kinds of shares in case of bankruptcy. They are taken into consideration after preferred and common stockholders are paid.
- Non-voting shares: The investor gets no voting rights in these types of shares. These are generally issued to employees and family members of key shareholders.
- Preference shares: No difference between this and preferred stock.
- Redeemable shares: The company can buy these shares back on or after a pre-decided date or after a particular event. It is basically a built-in call option.
- Redeemable preference shares are preferred stock with a call option.
Common and preferred indicate the various classes of a company's stock. They have different rights and privileges, and trade at varied prices. Common shareholders have the right to vote on company referendums. Preferred shareholders generally are not given any voting rights, but they are prioritized in getting repaid in situations where the company files for bankruptcy. While both shares might pay dividends, the ones in the preferred class are definitely the ones paid first whenever a dividend is declared.
Stock
When a company needs to raise capital, it either borrows money or issues stocks. Hence, stocks are basically financial securities that indicate that the stockholder owns a part of the corporation(s). Basically, every time you purchase a company's stock, you buy a percentage of ownership in the same firm. On the basis of the issuing company’s earnings, investors are paid out dividends monthly, quarterly, or annually for the stocks they hold.
There are four main types of stocks: common, preferred, Class A, and Class B.
- Common stock: Most investors typically invest in these kinds of stocks and they represent a large number of stock issued. A common stock gives voting rights to stockholders, which is usually a vote per share of stock.
- Preferred stock: This stock does not have any room for voting rights but gets reimbursed before common stock (but behind bonds) if liquidation takes place. Preferred stock is essentially a combination of stocks and bonds.
- Class A stock: This common stock has more voting rights than Class B stock.
- Class B stock: Also a kind of common stock but with fewer voting rights.
Stocks vs Shares
Here are some key differences between stocks and shares:
· Meaning: With stocks, you get an ownership interest in one or more companies whereas with shares, you actually gain part ownership of a specific company.
· Types: There are two main types of stocks – Common stock and Preferred stock. Just like shares, investors can own two types of shares – Private and Public
· Numeric Value: When you buy stock in a company, you are essentially the owner of the shares of the particular company's stock. As such, there is no value attached to the term stock, and can be used to refer to one or more companies. On the contrary, every share has a particular value and is in relation to a specific company.
. Nominal Value: Shares have a certain nominal value while stocks do not.
. Paid Up Value: Stocks are always fully paid but shares might be paid up in full or in part
· Transfer: Stocks can be separated into any amount. This essentially means that they are transferable into fractions. However, you may not be able to transfer shares into a fraction.
· Denomination: You can choose different types of stocks that also hold different values while you can be the owner of multiple shares in a particular company that might be of the same or equal value
The bottom line
You’re not the only one who thought stocks and shares are the same. Though generally, the distinction is insignificant and thus they’re often used interchangeably, as an investor one should know the difference. It turns out to be helpful when you’re about to begin your investment journey.
You will come across several instances where these terms are used interchangeably but remember the important difference between them. Stock is a generic term that indicates ownership interest in a publicly owned company. Share is specific and represents the smallest denomination of a company's stock.
Owning a company’s stock basically means owning shares of that company's stock. The term could be used for one or more firms and by itself, it holds no value. Every share has a specific value and is associated with a specific company.
Special Considerations
The interchangeability of the terms stocks and shares is largely applicable to American English. The distinctions in the two terms are to be taken into consideration for other languages. In India, for example, as per the Companies Act of 2013, a share refers to the smallest unit into which the company’s capital is divided. It represents the ownership of the shareholders in the company and can be partially paid. Whereas a stock refers to the collection of shares and commodities of a member, that could be converted into a single fund, that is fully paid up.