The distinction between shares and stocks can be a little hazy as investors often use them interchangeably when discussing the stock market. In short, shares are the unit investors invest in a company, while stock refers to the company that issues the shares.
Usually, stocks and shares refer to the same thing. However, there are times when it’s necessary to use the terms based on their correct definitions. Thus, understanding the difference between a stock and a share may provide a more nuanced look at investing.
Stock vs Share: Comparison
The differences between stocks and shares are subtle, but important to understand when you are investing.
A stock is the actual asset in which you invest, while a share is the unit of measurement for that asset. So, a stock tells you what you are investing in, and a share tells you how much of that stock you own.
|A stock refers to the publicly-traded company that issues shares||A share is the unit of measurement of ownership in a company|
|Stocks can refer to the ownership of many different companies||Shares usually refer to the specific ownership stake in a company|
|Stock is a more general term||Share is a more precise term|
For example, if you are interested in investing in a company called ABC, you will buy 100 shares of ABC stock. Owning 100 shares of ABC would give you a specific ownership stake in the company’s stock.
In contrast, if you said you wanted to buy 100 stocks, that would generally mean you wanted to buy shares of 100 different companies.
What Are Stocks?
Stocks, also called equities, are a type of security that gives investors a stake in a publicly traded company. A publicly traded company trades on a stock exchange, like the New York Stock Exchange or Nasdaq.
When you buy stock, you buy a share or fractional shares of a publicly traded company. You essentially own a small piece of the company, hoping to get a return on your investment.
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Companies typically issue stock to raise capital. Usually, the goal is to grow the business or launch a new product, but the company could also use the money to pay off debts or for another purpose.
Why Should I Buy Stocks?
Generally, people buy stocks with the hope that the company they invest in will earn money, and as a result, the investor will earn a return. There are two ways to earn money through stock ownership: dividends and capital appreciation.
Dividends are payouts made by a company to its shareholders. When a company is profitable, it can choose to share some of its profits with its shareholders through dividend payments. Typically, companies pay dividends on a specified schedule, although they can pay them at any time.
The second way to earn money is through capital appreciation, which is when a stock’s price increases above the purchase price. However, capital appreciation doesn’t lock in your gains; you don’t realize your profits until you sell your stock.
When you sell stock and realize a profit, you must pay capital gains taxes on the windfall.
Types of Stocks
There are two main types of stocks that investors can buy and sell.
• Common stock: The type of stock most people invest in, common stockholders have voting rights and may receive dividends.
• Preferred stock: Investors of this type of stock usually don’t have voting rights, but they often receive dividends before common stockholders. Preferred stock also gives investors a higher claim to assets than common stockholders if the company is liquidated.
💡 Want to know more? Here’s a breakdown of preferred stock vs common stock.
How Are Stocks Categorized?
Beyond common and preferred stocks, investors can buy and sell many different types of stocks. Usually, investors break down the various categories of stocks based on investing styles and company size, among other factors.
By Different Styles of Investing
Investors may divide up stocks of different companies into value and growth stocks.
Growth stocks have the potential for high earnings that may outpace the market. Growth stocks don’t usually pay dividends, so investors looking at these stocks hope to make money through capital gains when they sell their shares after the price increases.
Growth stocks are often tech, biotech, and some consumer discretionary companies. As the name suggests, consumer discretionary companies sell goods or services that consumers don’t consider essential.
Value stocks, in contrast, are stocks that investors consider to be trading below a price that accurately reflects the company’s strength. Value stocks usually have a lower price-to-earnings ratio.
Value investors are hoping to buy a stock when its price is low relative to its earnings, holding it until the market corrects and the stock price goes up to the point that better reflects the company’s underlying value.
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By Market Cap
Market capitalization, often referred to as market cap, is a common way to categorize stocks. Market cap is a measure of a company’s value. Below is a breakdown of market cap categories:
• Micro-Cap: $50 million to $300 million
• Small-Cap: $300 million to $2 billion
• Mid-Cap: $2 billion to $10 billion
• Large-Cap: $10 billion or higher
• Mega-Cap: $200 billion or higher
Generally speaking, companies with larger market capitalizations are older, more established, and have greater international exposure — so a higher percentage of a large-cap company’s revenue comes from overseas.
Meanwhile, smaller-cap stocks tend to be newer, less established, and more domestically oriented. Smaller-cap companies can be riskier but also offer more growth potential.
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What Are Shares?
A share is a piece of the company an investor can own. A share is a unit of ownership (e.g., you own 10 shares), whereas stock is a measurement of equity (e.g., you own 10% of the company).
Think of shares as a small portion of a company. So, if a company were a pie, a share would be a slice of said pie: the more slices, the more shares.
Shares play a role when calculating a company’s market cap. To find the market cap of a publicly traded company, you multiply the stock’s price by the number of outstanding shares, which is the number of shares currently owned by shareholders. This can also be referred to as shares outstanding, and the exact number can fluctuate over time.
Changes in the number of shares available can occur for various reasons. For example, if a company decides to release more shares to the public, the number of shares would increase.
Additionally you can own shares in a variety of assets other than stocks, like mutual funds, exchange-traded funds (ETFs), limited partnerships (LPs), and real estate investment trusts (REIT).
Types of Shares
Like with stock, investors may own different types of shares.
• Ordinary shares are the same as common stock. Holders of ordinary shares are entitled to vote on corporate matters and may receive dividends.
• Preference shares are the same as preferred stock. Holders of preference shares usually receive dividends before common stock dividends are issued. If the company enters bankruptcy, shareholders of preference shares may be paid from company assets before common stockholders.
• Deferred shares are shares usually issued to company founders and executives where they are the last in line to be paid in bankruptcy proceedings, following preferred and common stockholders.
• Non-voting shares, as the name suggests, do not confer voting rights to the shareholder. Non-voting shares may have different dividend rights and rights to company assets in the event of liquidation compared to holders of voting shares.
Stock Splits Definition
A stock split is a decision made by the board of directors of a company to adjust the price of their stock without changing the company’s overall value. It is one of the ways how the number of a company’s outstanding shares can change.
A company usually initiates a stock split when its stock price gets too high. For example, if a company’s stock is trading at over $1,000, it can be difficult for some investors to purchase and limits the availability of buyers.
To remedy this problem, a company will issue new shares through a stock split, lowering the price of each share but maintaining its market cap. A 10-for-1 stock split, for instance, would exchange 1 share worth $1,000 into 10 shares, each worth $100. Your total investment value remains the same, but the number of shares you own increases.
Other Options in Investing
Trading company stocks or shares isn’t the only option for investing. One alternative is to invest in shares of a mutual fund, a managed investment fund that pools money from several different investors. The money is then invested in various securities, including stocks and bonds.
Another option for investors is exchange-traded funds (ETFs). Like mutual funds, ETFs are baskets of securities packaged into a single investment vehicle. But unlike mutual funds, investors can trade shares of ETFs all day in the stock market.
One significant benefit that mutual funds and ETFs offer is portfolio diversification. A mutual fund and ETF can either be actively managed by a financial professional or passively managed, which means the fund tracks an index like the S&P 500.
Another way besides stocks or shares to get exposure in the market is through options trading. Options are contracts giving the purchaser the right — but not always the obligation — to buy or sell a security, like stock or (ETF), at a fixed price within a specific period of time.
The main difference between stocks and shares is that a share represents a unit of ownership in a company, while stocks refer to the ownership of one or more companies. However, most people use these terms interchangeably in regular conversion. But knowing the distinction between the two terms can help you better understand the stock market and investing.
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