Stocks and shares are basic terms used by investors in the stock market. Although investors usually use these terms interchangeably, there is a difference between them. The term “stock” refers to an ownership interest in a publicly owned company while, the term “share” refers to the smallest denomination of a stock of a company.
We will see how stocks and shares differ and their similarities. But first, let’s dig deep into what stocks and shares are.
What are stocks and shares?
Stocks, also known as equity, are an investment that represents a partial ownership interest in a company. Shares, on the other hand, are the smallest denomination of a particular company’s stock.
This means that to own stock in a company means to own shares of the company’s stock. Stocks can relate to one or more companies while each share indicates a specific value and relates to a specific company. To some extent, it may seem like stocks and shares denote the same thing- i.e an individual’s ownership in a public company. However, stocks refer to part-ownerships in one or more companies, while shares refer to the unit of ownership in a single company.
Let’s look at stocks and shares to have a better understanding of each entity.
What are stocks?
Stocks are securities that represent the ownership of the corporation issuing them. They are also known as equities. The units of stock are known as shares which gives the owner or holder a proportion of the assets and profits of the corporation based on how much stock is owned.
These securities are the foundation of several individual investors’ portfolios which are sold and bought mainly on stock exchanges. The stock exchanges do not own the stocks they trade and the trading of stocks has to conform to the regulations of the government in order to protect investors from fraudulent practices.
Stocks are traded on a stock exchange where sellers and buyers engage in an auction process by placing offers and bids to sell and buy stock. In the US, the two biggest exchanges happen to be the Nasdaq and New York Stock Exchange (NYSE). Both of them are in New York City with the NYSE being the largest by market capitalization.
The companies that issue out stocks do so to attract investors so that they raise money for the expansion of the company, launching of new products, the purchase of equipment, or for other reasons. As investors buy stocks they buy an ownership interest in the company hoping to get a return on their investment. The holders of these stocks in the company are called stockholders.
Now, it is important to note that ownership interest is not the same thing as ownership. Owning stock in a company does not mean the stockholder actually owns the assets or properties of the company. Furthermore, investment professionals usually use the word stocks as synonymous with publicly-traded companies. They may refer to stocks as food-sector stocks, value stocks, energy stocks, growth stocks, large-cap, mid-cap or small-cap stocks, penny stocks, tech stocks, blue-chip stocks, cyclical stocks, defensive stocks, dividend stocks, etc where these categories refer to the corporations that issued them rather than the stocks themselves.
Financial professionals also refer to common stock and preferred stock. The majority of people refer to common stocks when talking about the stock of a company. The common stock is a stock type that most people invest in which represents shares of ownership in a corporation. Apart from the common stock and preferred stock, there are several other types of stocks in the stock market. However, common and preferred stocks fall under these other stock types such as growth stocks, income stocks, value stocks, blue-chip stocks, penny stocks, etc.
Types of stocks
- Common stocks
- Preferred stocks
- Growth stocks
- Income stocks
- Value stocks
- Blue-chip stocks
- Penny stocks
- Stocks categorized by market cap
- Cyclical stocks
- Defensive stocks
These types of stocks are the stocks that most people invest in. They represent the majority of the stock that companies issue. One of the common features of the common stock is that it confers voting rights to the stockholders, usually one vote per share of stock. This means that the common stockholders have the right to vote at meetings. These stockholders also receive company dividends at regular intervals and have a more directive stake in the company.
This type of stock is really a hybrid between stocks and bonds. The preferred stock does not typically confer voting rights but in the event of liquidation, the preferred stockholders are reimbursed ahead of common stockholders though after bondholders. The holders of preferred stocks are not given voting rights but receive dividend payments ahead of common stockholders. In an event that the company goes bankrupt, the holders of preferred stocks are given more priority over common stockholders.
These stocks grow and earn at a faster rate than the usual market average. This category of stocks rarely offers dividends. Growth stocks companies don’t pay dividends because they reinvest a majority of their earnings into their businesses. This reinvestment can yield a higher return on stockholders’ equity and give a higher return to stockholders in form of capital gains. Therefore, the investors buy growth stocks with the hope of capital appreciation.
Growth stocks appear to outperform during periods of low interest rates and economic expansions. For example, a start-up tech company may issue this kind of stock which may outperform significantly due to access to cheap funding and a robust economy. These stocks, however, are risky because if the growth-oriented company doesn’t grow as expected, investors lower its future prospects. Consequentially, the stock price of the company drops.
This category of stocks is also known as dividend stocks which pay dividends consistently. The dividends are provided by distributing the profit made by the company or its excess cash to stockholders. Thus, helping an investor to generate regular income. These dividend payments given to the investor by the company provide valuable income for investors and this is what makes the stocks an attractive investment.
The company that issue income stocks have more mature business models and relatively fewer long-term opportunities for growth. More so, the dividend may continue to grow year after year as the company’s earnings grow. However, this is not the case for the dividends of preferred stock or the interest payments of bonds.
These stocks usually have a low price-to-earnings (PE) ratio which are stocks of companies trading at a lower price in relation to their fundamentals such as sales, earnings, or dividends. Value stocks are usually compared with growth stocks. Investors believe that the market is underestimating these stocks and buys them expecting the stock price to rebound soon. These stocks trade at a lower price than what the performance of the company portrays. Therefore, due to some inefficiencies in the market, these stocks trade at a price that may not match the company’s performance.
These are stocks of big, well-known companies with a solid growth history and reputation. Such stocks pay dividends during bad and good times and are attractive investments due to the reliability of the company. Blue-chip stocks tend to be the cream of the crop as they are issued by companies that are industry leaders with strong reputations.
The issuers of these stocks are the largest and most prestigious companies that are consistently profitable. They are well-established and have a large market cap. These stocks usually offer investors, a stable predictable income with a steady to slow growth in value. In as much as blue chip stocks may not provide the absolute highest returns, their stability makes them an attractive investment for investors with a low tolerance for risk.
These stocks are quite the opposite of blue-chip stocks as they are issued by low-quality companies. The prices of penny stocks are extremely cheap, usually trading at $5 or less per share. These stocks are cheap because the companies’ prospects are dicey. The majority of penny stock companies may even go out of business or may never be profitable. Therefore, these stocks are risky investments. However, investors still find these stocks attractive despite the extreme risk associated with them. This could be because of the potential for their value to increase dramatically.
Stocks categorized by market cap
Stocks can be categorized by the size of their market capitalization such as large-cap, mid-cap, and small-cap stocks. The market capitalization of a company is the measure of value gotten from multiplying the company’s current stock price by the total number of outstanding shares (i.e Market capitalization = Stock price × number of shares outstanding)
The companies that have stocks with the biggest market capitalizations are called large-cap stocks, while mid-cap and small-cap stocks represent the successively smaller companies. Depending on inflation, stocks with a market cap exceeding $10 billion are categorized as large-cap companies, whereas a mid-cap company has stocks with a market cap of $2 – $10 billion. The small-cap companies, on the other hand, are valued at a market cap of less than $2 billion.
These stocks also known as secular or noncyclical stocks are stocks of companies that offer products and services regardless of the economy’s well-being. This means that defensive stocks render consistent returns in most economic conditions and stock market environments.
Defensive stocks operate in recession-proof industries like consumer staples, food companies, utilities, and drug manufacturers. The continuous demand for such commodities can keep the industries strong even when the economic cycle is weak. Therefore, even in periods of economic weakness, the stocks of these companies are capable of generating consistent returns. Thus, they are less likely to face bankruptcy and are resistant to economic cycles. They tend to make a profit regardless of the market cycle.
These stocks are the opposite of defensive stocks. Unlike defensive stocks that thrive in both periods of recession and prosperity, cyclical stocks are very sensitive to economic up-and-downs. These stocks are issued by companies whose earnings are affected sharply by changes in the business cycle or by fundamental changes within a specific industry. Cyclical stocks may suffer decreased profits and tend to lose market value in times of economic hardship.
The earnings and stock prices of cyclical companies tend to rise rapidly when business conditions are good. But when business conditions are bad, the earnings and stock prices of these companies decline rapidly. This means that these stocks follow economic cycles of expansion, recession, peak, and recovery and are affected directly by the economy’s performance. They would consist of company stocks in the travel, luxury goods, and manufacturing industries.
What are shares?
Shares are the measure of stock which is the smallest denomination that stock comes in. They are the single smallest denomination of the stock of a company. Therefore, if you’re dividing up stock and referring to specific characteristics, the proper word to use is ‘shares’.
Investors, by measuring stock in shares can easily calculate the value of their investment. Each share has a value and fluctuates daily on the stock exchange. Therefore, based on the percentage of all outstanding shares an investor owns, he can determine the size of his ownership or stake in the company. For example, if Company ABC issued 100,000 shares of stock and an investor owns 10,000 shares, this means the investor owns 10% of the outstanding shares and not 10% of Company ABC.
The trading of stocks would be impossible if there wasn’t a way to measure ownership interest. So this is where shares come in representing units of stock. As with stocks, there are different types of shares such as common shares and preferred shares. These two are the main types of shares but are not the only type of shares.
Companies usually designate different classes of shares as A, B, C, and so on to fit the needs of their investors. They customize different classes of stock giving them different voting rights. For instance, one class of shares would be held by a select group who are given just one vote per share, whereas another class of shares would be issued to a group of investors who are given perhaps five votes per share.
Types of shares
- Ordinary shares
- Alphabet shares
- Preference shares
- Cumulative preferred shares
- Management shares
- Deferred shares
- Non-voting shares
- Redeemable shares
Ordinary shares are the same as common shares which represent the basic voting rights of the company. The majority of companies only have ordinary shares which reflect the equity ownership of a company. This type of share usually carries one vote per share and each share gives the holder right to dividends. More so, in the event of winding up or sale, ordinary shares give rights to the distribution of the company’s assets.
These shares are a subclass of ordinary shares that allows the company to vary the rights attached to shareholders. Even though companies can give each class of shares a descriptive name such as preference shares, non-voting shares, or redeemable shares, they usually just label share classes with alphabet letters A, B, C, D, etc.
Alphabet shares are labeled depending on the number of subgroups a company wishes to create. These shares enable companies to restrict or enhance certain shareholders’ rights with each class conferring different voting rights, rights to capital, and rights to dividends. For instance, A shares can be given a greater rate of dividend than B shares.
These shares give their holder a preferential right to a fixed amount of dividend. This means that the preference shareholders will receive dividends ahead of ordinary shareholders. In the case of insolvency, they also have a higher priority claim to the assets of the company.
Due to the fact that this class of shares has many benefits and guarantees, it is mostly issued to investors like venture capitalists who invest in startups. Nevertheless, the holders of these shares do not have the same ownership rights in the company as ordinary shareholders. For instance, they are usually non-voting and redeemable sometimes.
Cumulative preferred shares
These are shares wherein any undeclared or unpaid dividends for the current year must be accumulated and paid for in the future. This class of shares requires payment of missed dividends ahead of other types of shares. The holders of cumulative preferred shares do not participate in the company’s profits and have a fixed dividend rate irrespective of the profit margin. Nevertheless, these shares are costlier, cannot demand interim dividends, and do not have voting rights.
These shares give their holders extra voting rights at the general meetings of the company, for instance, two votes per share. In the event of shares being issued to outside investors, the management shares are usually used to enable company directors to retain control of the company.
These kinds of shares carry fewer rights than ordinary shares and have no rights to assets in the event of bankruptcy until preferred and common stockholders have been paid. Deferred shares dividends are only paid after a certain date or event and are paid after all other classes of shares have been paid. These shares are usually issued to employees and are not tradable until a certain date. They are issued to employees in order to increase their loyalty and give them a long-term interest in the company.
These shares are typically issued to employees and family members of primary shareholders. They give the holder an entitlement to a portion of the company’s capital but confer no voting rights. This means that the holders of these shares do not take part in general meetings.
Redeemable shares are shares that can be repurchased by the company on or after a predetermined date or following a specific event. Some shares are bought back by the issuer for several reasons. The redemption date can either be fixed in advance or be decided at the company’s discretion. Moreso, the price at which the share is bought back is usually the same as the issue price, but not necessarily.
Redeemable shares are usually given to employees so that the company can get its shares back if the employee leaves. Nevertheless, the ability of a company to redeem shares is limited and depends on specific statutory requirements. Redeemable preference shares, for instance, are a kind of redeemable share. It is a common way of financing a business that allows the company to repurchase its shares in the future. These shares are repurchased if interest rates drop and the company wants to issue new shares with a lower dividend rate while giving investors the chance to get their money back at a pre-agreed price.
Stocks and shares differences
- The difference between shares vs stocks is that a share is a single unit of ownership in a company while a stock represents part ownership in one or several companies.
- The difference between buying stocks and shares is that investing in stocks means that the investor has a portfolio of shares across different companies while investing in shares means having some units of particular company stock.
- The paid-off value of stocks vs shares is that stocks are fully paid in nature whereas, shares could be either fully or partly paid up.
- Another difference between shares and stock is that the owners of shares in a specific company can have multiple shares of the same or equal value whereas, owners of stocks have the option to choose different stocks of different values.
- The nominal value is assigned to each share at the time the stock is issued. This value is different from the market value which varies based on the demand and supply of the shares.
- Another stocks and shares difference in investment is that shares can refer to a large group of financial instruments known as securities which can include exchange-traded funds (ETFs), mutual funds, real estate investment trusts, limited partnerships, etc. whereas, stocks particularly refer to corporate securities and equities traded on a stock exchange.
What is the difference between stocks and shares?
The main difference between shares vs stocks is that a stock is a broader term to convey ownership in a company, whereas shares are the individual units of ownership. The table below highlights the main differences between stocks and shares.
|Criteria for comparison||Stocks||Shares|
|Definition||A stock refers to an ownership interest in a publicly owned company||A share refers to the smallest denomination of a company’s stock|
|Ownership||An individual owning stocks means owning shares of several companies||An individual owning shares means only buying shares of a specific company|
|Denomination||The owners of stocks have the option to choose different stocks of different values.||The owners of shares in a specific company can have multiple shares of the same or equal value|
|Paid-up value||They are fully paid in nature||They could be either fully or partly paid|
|Kind of investment||They particularly refer to corporate securities and equities traded on a stock exchange||They can refer to a large group of financial instruments known as securities|
|Types||Growth stocks, income stocks, value stocks, blue-chip stocks, penny stocks, large-cap stocks, mid-cap stocks, small-cap stocks, cyclical stocks, defensive stocks, etc.||Ordinary shares, alphabet shares, preference shares, cumulative preferred shares, management shares, deferred shares, non-voting shares, redeemable shares, etc|
Holders of shares vs stocks
The term used for the holders of shares vs stocks differs. The holders of shares are shareholders while the owners of stocks are stockholders. A stockholder typically owns stock in a company, whereas a shareholder owns shares of stock.
In as much as a stockholder and shareholder have an ownership interest in the company, the term ‘shareholder’ technically refers to one that owns shares of stock and an equity interest in the company.
Moreso, a stockholder could be one that owns raw materials or inventory rather than shares. Additionally, do not confuse stakeholders with stockholders and shareholders. This is because, an employee, owner, shareholder, vendor, debtor, or even a customer could be a stakeholder.
- Stocks and shares are both investments.
- They represent ownership in the issued company
- Stocks and shares are both issued by a company
Are stocks and shares the same thing?
In conclusion, stocks and shares are not necessarily the same thing even though some people usually intermingle the two terms. The difference between stocks and shares matters because they relate to each other in a way that helps investors understand the role that each plays.
The term ‘stocks’ is the more general, generic term usually used to describe a slice of ownership of one or more companies while the term ‘shares’ is a more specific term usually used to refer to the ownership of a particular company.
Therefore, if an investor says he owns shares, some people’s inclination would be to ask ‘shares in what company?’. The investor can own shares of several kinds of financial instruments such as limited partnerships, mutual funds, real estate investment trusts, exchange-traded funds, etc. An investor, on the other hand, can tell their broker to purchase 150 shares of Company XYZ but if he tells the broker to buy 150 stocks, he would be referring to a whole panoply of companies i.e partial ownership from 150 different companies.
- When to use process costing - May 31, 2023
- Disadvantages of Vertical Integration - May 30, 2023
- Vertical integration benefits - May 25, 2023