‘Stocks’ and ‘shares’ are basic terms that investors must understand before starting their stock market journey. However, the terms are often used interchangeably. And many people don’t know that there is a subtle difference between stock and share.
To some extent, it is true that they denote the same thing—an individual’s ownership in a public company. However, while the term ‘stock’ refers to part-ownership in one or more companies, the term ‘share’ has a more specific meaning. ‘Share’ refers to the unit of ownership in a single company.
Now, let us dig deeper into the essentials of the stock vs share argument.
What Is A Stock?
Stocks are financial securities that represent part-ownership in one or more companies. Upon buying a company’s stock, you become a shareholder of that company. The stock certificate serves as proof of ownership and mentions the number of stocks you hold. You can buy stocks of a single company or several companies. There is no limit on the number of stocks you can hold in your portfolio.
In general, investors aim to buy the stocks of companies that are likely to increase in value. When such appreciation takes place, the stockholder can sell the stocks and earn a profit. Apart from this, as a result of their part-ownership, stockholders often receive a share of the company’s profits in the form of monthly, quarterly, or annual dividend payments. Buying stocks is thus a lucrative way to make money. Plus, it reduces the impact of market inflation over a period.
A share is the smallest denomination of a company’s stock. So, each unit of stock is a share, and each share of stock is equal to a piece of the company’s ownership.
Suppose a person X owns ‘100 shares of ABC Inc.’ Now, if ABC Inc. has one lakh shares, it means X owns 0.1% of the company. Any person or entity with 10% ownership in a company, regardless of how many shares they hold, is termed a principal stockholder.
People who buy shares may earn interest on the money invested along with dividends. But that is just part of their motivation to invest in a company. Another reason is that their investment in the company pushes up the company’s value, which in turn increases its share prices. Shareholders can then sell these shares for higher than their purchase price to make money on their investment.
Here are some essential points of difference between stock and share:
Definition: ‘Stock’ represents the holder’s part-ownership in one or several companies. Meanwhile, ‘share’ refers to a single unit of ownership in a company. For example, if X has invested in stocks, it could mean that X has a portfolio of shares across different companies. But if X has invested in shares, the next questions should focus on ‘shares of which company’ or ‘how many shares’.
Ownership: When an individual owns shares of several companies, you can say that they own stocks. But if someone bought shares of a specific company, they only own shares.
Denomination: Individuals who own stocks have the option to choose different stocks of different values. Those who own shares in a specific company can, of course, own multiple shares. But the shares will only be of the same or equal value.
Paid-up value: Stocks are always fully paid-up in nature. However, shares could be either partly or fully-paid up.
Nominal value: This value is assigned to each share at the time the stock is issued. It is different from the market value which varies based on demand for and supply of the shares.
Kind of investment: Shares can refer to a large group of financial instruments known as securities. They can include mutual funds, exchange-traded funds (ETFs), limited partnerships, real estate investment trusts, etc. But stocks particularly refer to corporate equities and securities traded on a stock exchange.
Types Of Stock
There are mainly two kinds of stocks: common stock and preferred stock.
Common stock: Common stock investors have the right to vote at shareholders’ meetings. They also have a more directive stake in the company and receive company dividends at regular intervals.
Preferred stock: Preferred stockholders are not given voting rights. However, they receive dividend payments ahead of common stockholders. Investors in this category are given more priority over common stockholders if the company goes bankrupt.
Both common and preferred stocks fall under the following categories:
Growth stocks: Stocks of this category grow and earn at a faster rate than the usual market average. As they rarely offer dividends, capital appreciation is what investors hope for. A start-up tech company may offer this type of stock.
Income stocks: These stocks pay dividends consistently and help an investor to generate regular income. An established utility company’s stocks would be an example of income stocks.
Value stocks: These usually have a low price-to-earnings (PE) ratio. So, they are much cheaper than those with a higher PE ratio. They could be either growth or income stocks. People buying value stocks expect the stock price to rebound soon.
Blue-chip stocks: These are the shares of big, well-known companies with a solid growth history. Such stocks generally pay dividends. Blue-chip stocks are common among investors due to the reliability of the company.
In addition, stocks can further be categorised by their market capitalisation and size. There are large-cap, mid-cap, and small-cap stocks. While shares of small companies are called microcap stocks, low-priced stocks are known as penny stocks.
Companies can issue various types of shares based on their rights and features. Two well-known types are common shares and preference shares.
Common shares: A common share is a basic type of share which could be classified into different categories depending on voting rights. Take, for instance, the case of Class A and Class B shares. Class A common shares may come with one voting right per share. But Class B shares might get 10 voting rights per share.
Preference shares: Preference shares are a less popular type of share that functions just like bonds. They give guaranteed dividend payment to their holders. They also ensure a priority claim on the company's assets if the company goes out of business.
Benefits And Risks
For someone with a long-term goal, investing in stocks is a great way to get capital appreciation. Young investors, who are saving for the long haul, can get positive returns by investing in stocks.
However, stock prices can plunge as well. Besides, there is no assurance that the company stocks you hold will grow and perform well. That is why it is important to factor in the potential risk before investing. And never invest more than you can afford to lose.
The stock price of a company may fluctuate multiple times a day. Market fluctuations could be a factor while investing in stocks. In addition, the stock price can take a hit for various reasons including internal and external factors like global, political, or economic issues.
If you sell your shares below the price you paid for, you will lose money. But if you hold on until the price goes up, you could pocket a nifty profit.
Example of stock price fluctuation
Suppose you bought 100 shares of XYZ Ltd at Rs 85 (10085=Rs 8,500) in the past week. The very next day, the stock price declines to Rs 75. Now, the total value of your shares stands at Rs 7,500 (10075) against the past value of Rs 8,500. If you were to sell the shares, your total loss would be Rs 1,000. But a week later, the stock price crosses your purchase price and stands at Rs 90. This brings the total value of your shares to Rs 9,000 (100*90). If you sold the shares now, you would pocket an overall profit of Rs 500.
How Do People Make Money In Stocks?
It is well known that stocks are riskier than any other fixed investments. But they also carry the possibility to fetch the maximum returns. Have you already invested in stocks? There are two ways you can earn: by selling the shares and through dividend earnings.
Selling shares: You will need to sell the shares for more than what you paid for them. The price difference would be your profit.
Dividend earnings: Companies send regular payments to their shareholders in the form of dividends. Though not all stocks offer dividends, those that do usually pay on a quarterly basis.
Get Your Stock Investment Right
You now know the basics about stocks and shares. So, why not dive in to the world of stock market investment? Here are some tips to help you get it right:
Safeguard your portfolio through diversification: This helps protect your investment from depreciation. To diversify your portfolio, simply spread your investment across different asset categories. Then if one asset performs poorly, you can re-tune your strategy to safeguard against further loss.
Plan your investment to prevent losses: Rather than chase after every promising stock, choose eight to 10 scrips to add to your portfolio. Then go over the fundamental and technical research on these scrips, and keep an eye on market movements. This will help you to spot patterns and pinpoint exactly when to buy or sell a scrip.
Invest online: Buy individual stocks through an online broker: For this you will simply need to open demat and trading accounts. Just fill out an application form and complete the Know Your Customer (KYC) formalities.
Summing Up
The difference between stock and share is subtle. In most cases, the difference is not really significant. But you must know all sides of the stock vs share argument before taking the plunge into equity investments. Once you have an investment strategy in place, you can buy up individual shares and build a portfolio of stocks. Just remember to always diversify your portfolio and monitor your short- and long-term stock selection. This will safeguard your investments even when the markets are volatile.
