Essentially, a stock is the actual asset you are investing in. An asset is something that has “economic value and can act as a store of wealth.” 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.
The distinction between shares and stocks can be a little hazy as the two words are frequently used interchangeably. But understanding the difference may help a beginner investor be able to discuss the equity market more fluently.
Let’s dig into the details.
What Are Stocks?
Stocks, which are also referred to as equities, are a type of security that give investors a stake in a publicly traded company. A publicly traded company is one that trades on stock exchanges. Privately owned companies are not traded on the stock exchange.
When you buy stock, you are buying a share or shares of a publicly traded company. You essentially own a small piece of the company.
Companies typically issue stock to raise capital (money or other financial assets). Usually the goal is to grow the business or launch a new product, but the money could also be used to pay off debts or for another goal. When companies issue stock for the first time, it’s called an initial public offering or IPO.
Recommended: Guide to Tech IPOs
Why Should I Buy Stocks?
Generally, people buy stocks in the hope that the company will earn money, and as a result, the individual investor will earn a return. There are two ways to earn money through stock ownership.
The first is through dividends. When a company is profitable, they can choose to share some of their profits with their investors through dividend payments. Typically, companies pay dividends on a specified schedule, although they can be made at any time. If the payments are unscheduled, they are often referred to as special dividends.
The second way to earn money is through capital appreciation, which is when a stock’s value increases. If the value of a stock rises from the time it was purchased to the time it was sold, the profit made is referred to as the capital gains, which are subject to taxes. If stock is sold at a price lower than the one at which it was purchased, the loss is referred to a capital loss.
What Are Shares?
A share is the smallest whole piece of the company an individual 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 like 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.
A company’s worth, or overall value is called the market capitalization, also referred to as market cap. To find the market cap of a publicly traded company, multiply the price of the stock by the number of outstanding shares, which are 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 a variety of reasons, for example if a company decides to release more shares to the public, the number of shares would increase.
Stock Splits Definition
The number of shares could also increase if a company decides to complete a stock split–a decision made by the board of directors of a company to adjust the price of their stock without changing the overall value of the company.
If a company’s stock price gets too high, say over $1,000, this can make it difficult for some investors to purchase and limits the availability of buyers.
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 your shares go up.
How Are Stocks Categorized?
Common Stock vs. Preferred Stock
There are two broad categories of stocks: common and preferred. Common stocks typically give the owner voting rights at shareholder meetings. These types of stocks also usually earn dividends.
Preferred stockholders, on the other hand, don’t usually have voting rights but do earn dividends. Usually the dividend payments are received by preferred stockholders before common stockholders receive payment.
If a company goes bankrupt, preferred stockholders generally have priority over common stockholders if the company’s assets are liquidated.
If a shareholder has voting rights, they can typically vote on things that influence corporate policy, like who sits on the board of directors. The number of shares a shareholder owns is usually related to the influence that shareholder has.
Different Styles of Investing
Value vs. growth stocks is one way to divvy up the stock market. Growth stocks are stocks that are growing faster than the market average. Growth stocks don’t usually pay dividends, so investors looking at these types of stocks are hoping to make money through capital gains when the shares are sold.
In today’s market, growth stocks are often tech, biotech, and some consumer discretionary companies–these are companies that sell goods or services that aren’t considered essential by consumers.
A company that offers a strong earning potential relative to the initial cost of investment is often considered a value stock. These stocks often have a lower price-to-earnings ratio.
Often times, value stocks will be less expensive than stocks from similar companies within the same industry. Basically, a value stock is one that is cheaper than the company’s performance indicates it should be.
Stocks by Market Cap
Market cap is another way to examine different types of stocks. 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, larger companies tend to be 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.
Other Options in Investing
Trading company stocks or shares isn’t the only option for investing. One alternative is to invest in a mutual fund, which is a managed investment that pools money from a number of different investors. The money is then invested in a variety of securities, including stocks and bonds.
Another option is exchange-traded funds or ETFs. These are baskets of securities that are packaged into a single share. They’re similar to mutual funds since they also give access to a broad range of securities, but investors can, however, buy an ETF with a single investment and trade them all day in the stock market.
One big 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–track an underlying index.
Another way besides stocks or shares to get exposure in the market is via options trading. Options are contracts that give buyers the right, but not the obligation, to purchase shares of a stock or ETF.
In the past 10 years, investing has become much easier thanks to the Internet and advances in mobile technology. It also helps that the recent bull market in equities was the longest in history.
Keeping your money in cash is inherently less risky than investing it, but you could be losing out on potential returns by letting your money stay stagnant. While there are a variety of assets to invest in, perhaps the most frequently discussed are stocks and shares. Understanding these two concepts could shed some light and potentially demystify investing.
When you’re ready to jump into the stock market, consider SoFi Invest®. The Active Investing platform allows users to buy and sell company stocks, ETFs or fractional shares without incurring commission fees. If the do-it-yourself approach isn’t for you, SoFi also offers an Automated Investing service that automatically builds and rebalances portfolios.
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Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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