What's The Difference Between Stocks and Shares

Shares and stocks are basic terms that any investor must understand before they begin their stock market journey. But are stocks and shares the same thing? No, they’re not.

While these terms are mostly used interchangeably, the distinction between financial market shares and stocks is blurry. American English uses both words to refer to financial equities, particularly securities that denote a public company’s ownership (initially known as stock certificates).

These days, the difference between the terms is more about syntax and is usually derived from their usage context. Thus, understanding stocks and shares is crucial for any investor.

So what’s the difference between stocks and shares, and what does each term mean? This detailed guide on shares and stocks for beginners has all the answers.

What Are Stocks?

The term refers to financial securities representing part-ownership in one or multiple companies. When you buy a company’s stock, you’ll be counted among its shareholders. You can hold as many stocks as you can in your portfolio.

Companies offer stock to attract potential investors and raise money for their expansion, buying equipment, launching new products, and other reasons. Stocks give you ownership interests with the expectation of earning a return on your investment.

Generally, investors look to buy stocks of entities with a higher likelihood of increasing in value. When it appreciates, you can sell your stocks and earn returns. Moreover, your part-ownership status lets you receive a share of the company’s profits as annual, quarterly, or monthly dividend payments.

Thus, buying stocks can be potentially lucrative and significantly reduce market inflation’s effect over time.

Types of Stocks

Stocks are classified into:

Common stock – Representing the majority of stocks issued, this is what most people invest in. This stock confers voting rights to you, the stakeholder, usually one vote for every share of stock.
Preferred stock – This doesn’t necessarily offer voting rights but is compensated before common stock during liquidation. In essence, this is a hybrid between bonds and stocks.
Class A stock – This common stock is the same as its Class B counterpart, except that it confers additional voting rights.
Class B stock – It’s the same as Class A but comes with fewer voting rights.

What are Shares?

This is generally a company stock’s smallest denomination. Therefore, each stock unit is a share, and each share equals a piece of the entity’s ownership.

For instance, assuming you own 100 shares of ABC Ltd. Now, if the company has one hundred thousand shares, it means you’ll own 0.1 percent of the firm. Any entity or person with 10 percent ownership, regardless of the number of shares, is considered a principal stockholder.

When you own shares, you may earn interest on the invested funds along with dividends. Your investment in the company will push up its value, increasing its share prices. You can then sell your shares at a higher price than you bought them to earn on your investment.

Types of shares

Like in stocks, you have different options for choosing shares. They include:

Ordinary shares – These are similar to common stock
Cumulative preferred shares – This form of preferred stock requires payment of missing dividends before other share types.
Deferred shares – These shares limit your right to assets during bankruptcy until common and preferred stockholders are paid.
Non-voting shares – They’re usually issued to family members and staff of the primary shareholders, and you’ll not have voting rights.
Preference shares – These are similar to preferred stocks.
Redeemable shares – The company can purchase these shares following a specific event or on or after a pre-established date.

The two items might share numerous similarities, but there are several differences between stocks and shares. Apart from their definitions, here are the key distinguishing points:

Ownership – If you own several companies’ shares, you own stocks. But you’re a shareholder if you purchased a specific company’s shares.
Denomination – You can choose multiple stocks with varying values if you own stocks. But if you own a specific company’s shares, they’ll be of standard value.
Paid-up value – Stocks are usually fully paid up, but shares can be partly paid up.
Nominal value – This is the value designated for each share during stock issuing. It’s not the same as market value, which fluctuates based on the demand and supply of shares.
Investment type – Shares may refer to a vast collection of financial tools called securities, which can include exchange-traded funds, mutual funds, real estate investment trusts, limited partnerships, etc. But stocks specifically refer to securities and corporate equities.

What Is A “Stake?”

The term stake often describes the amount of stock you own. If you own a company’s stock, your stake will be the percentage of its stock in your possession. However, it doesn’t only refer to stock ownership but is a more general terminology that conveys partial rights in an organization.

For instance, if you buy an investment property with your business partner, both of you own a stake in the asset even without a formal stock structure. Furthermore, bondholders are usually considered company stakeholders since they can benefit from the proceeds of a performing company.

Also, if you invest in a growing, non-public entity, you may receive a stake in the company based on your investment. For example, let’s assume a company seeks to raise Ksh. 5 million in exchange for a 20 percent stake in its business. If you invest the amount in the organization, you’ll be entitled to 20 percent of the profits going forward.

Stockholders, Shareholders, And Stakeholders

A person owning stocks in a public company can be called a shareholder, stakeholder, or stockholder. In reality, the three words are right.

Of the three words, stockholder and shareholder are essentially interchangeable across situations. There aren’t any conspicuous stocks and shares differences, and both terms can refer to an investor owning a company’s shares of stock.

On the other hand, a stakeholder is relatively more general. It may not necessarily refer to stock ownership but simply means that the entity or person has some financial interests in a firm.

The Key Takeaway

While investors often use the words share and stock interchangeably, there’s a crucial difference between the two. Stock is generic and refers to ownership interests in a public company. On the other hand, a share is a specific term referring to the smallest denomination in a firm’s stock.

Owning a company’s stock simply means you own shares of the entity’s stock. The word stock can’t be valued and may relate to one or multiple companies. But each share links to a specific company and has a particular value.

Hopefully, this guide on stocks and shares for beginners has enlightened you on the difference between the two terms.