fbpx

What Is the Difference Between Shares and Stocks?

I t’s incredibly common to hear the words ‘shares’ and ‘stocks’ used interchangeably. However, there’s actually a subtle difference between the two terms. While both refer to ownership in a company, one determines the percentage of a company you own. Find out more about the difference between shares and stocks.

Key Takeaways:

  • The difference between stocks and shares lies in what each term means for ownership in a company.
  • A company can issue stock. Then, each unit of stock is considered a share.
  • ‘Stock’ is the generic term, while ‘share’ is the specific term.

What Is the Difference Between Stocks and Shares?

Image via Unsplash by mrkfn

You’ve likely heard (or used) the words ‘shares’ and ‘stocks’ interchangeably. For the most part, that’s completely fine. The difference between stocks and shares usually isn’t significant enough for the usage to matter in most contexts.

Delving into the definitions of both terms will help you understand the subtle difference in when you should use each word.

What Is Stock?

The term ‘stock’ refers to equity ownership in a given company. When you own stock in a company, that makes you an owner of that company. Thus, you have a claim on that company’s profits and assets.

Any stockholder can look forward to a few key benefits. If the company in which you own stock decides to distribute some of its profits as dividends, you’ll get a cut of the profits. Another perk of owning stock is that it gives you the right to vote both for the board of directors and all proposals that the board puts before the company’s stockholders.

Types of Stocks

Financial analysts and investors have pretty much innumerable ways for categorizing stocks. Examples can include:

  • Blue-chips.
  • Financial stocks.
  • Growth stocks.
  • Large-cap stocks.
  • Small-cap stocks.
  • Tech stocks.
  • Value stocks.

The key detail here is that these stock classifications don’t really refer to the stocks themselves, but instead to the companies that issue those stocks. In other words, a blue-chip stock is a stock a big, stable company issues, and a tech stock is just a stock that a technology company issues. Here’s the kicker: The things you think of as ‘types’ of stock, like common stock and preferred stock, aren’t stock types after all. They’re actually types of shares.

What Are Shares?

Shares refer to the individual pieces of ownership you have in a company. Any stockholder’s influence on the company depends on how many shares they own. Look at it this way: If you and your best friend own shares in a company, but you own one share and they have two, you are both considered stockholders and part-owners of that company. However, your best friend owns two times as much of the company than you.

Stockholders are assigned voting rights and dividends on a per-share basis. So, if you get $1 in dividends in the above example, your friend gets $2 in dividends. Likewise, you get one vote for the board, but your best friend gets two.

Types of Shares

Companies can issue a variety of share types. When you’re investing, you’ll need to understand if you’re getting common or preferred shares as well as public or private shares. The class of shares makes a difference, too.

When you see the share price of a company on the ticker, you’re looking at the price of one common share.

Kinds of shares to look out for include:

  • Common shares: Common shares are the type most frequently issued. Common shares are basic shares that a company issues.
  • Preferred shares: While preferred shares are not as common as common shares, they’re not really rare, either. Preferred shares work a lot like bonds since they come with guaranteed dividends while also giving shareholders a priority claim on the assets of a company if the company ends up going out of business. However, preferred shares don’t usually come with special voting rights.
  • Classes of shares: Companies issue different classes of shares at times. These classes typically come with different privileges. For instance, while Class A common stock might come with one vote each, Class B common stock may have ten votes for each share. That’s how founders and their families get to sell stock but still keep control of their company.
  • Public shares: You’ll see public shares listed on a stock market. Investors can fairly easily buy or sell public shares on the market.
  • Private shares: Private shares are more difficult for investors to trade. These shares are not traded on a stock market. As a result, it can be harder to find a potential seller or buyer.

Private companies can sometimes also become public companies. When this occurs, the shares of the company also change from private shares to public shares.

In many cases, this transformation will involve an IPO, or initial public offering. The private company lists shares on a stock market, thereby allowing all kinds of investors to start buying and selling its shares. For example, before Facebook went public, it was difficult for regular investors to buy and sell its stock. Then Facebook had an IPO, and now you can buy or sell Facebook shares on the market.

Understanding the difference between stocks and shares requires a look at ownership in a company. Though both shareholders and stockholders are considered part-owners in a company, the number of shares held will determine the percentage of a company you own. When a company issues stock, each unit of that stock is considered one share.

Key Comparisons Between Stocks and Shares

Now that we have a handle on what stocks and shares really mean individually, let’s dive into some of the key comparisons between the two:

  • Generic vs. specific: ‘Stock’ is a generic term, while ‘share’ is specific. You can talk about an investor investing in stocks in the broader sense, but shares refers to the specific company, i.e. ‘I just bought five shares in Starbucks.’
  • Issuing: A share is always originally issued. The original issue of stock isn’t possible. You can also talk about the way shares are issued, such as at a discount, at a premium, or at par value:
    • At a discount: Shares that are issued below their face value are issued at a discount.
    • At a premium: Shares that are issued at a premium are issued above their face value.
    • At par value: Shares issued at par value are issued at face value, also known as nominal value.
  • Macro vs. micro: Stock is a macro concept, while share is a micro concept. You can’t actually specify a particular investment when talking about stock, but you do mean a specific company when talking about shares. You can think about stock on the industry level and shares on the level of a particular company.
  • Nominal value: A share does have a nominal value. Stock does not.
  • Number: A given share has a distinctive number that distinguishes it from other shares. Stock doesn’t have this number.
  • Partly paid vs. fully paid: Shares can either be partly or fully paid. Stock must always be fully paid.
  • Share transfer: You cannot transfer fractional shares. You can, however, transfer stock in fractions.
  • Size: A share is the smallest piece you can have in the share capital of a company to gain ownership of a company. A bundle of shares a company member has are known collectively as stock.
  • Types: Because stock is a generic term, you can’t use it to talk about types. You can, however, talk about types of shares.

Example of the Difference Between Shares and Stock

All in all, the difference between shares and stock is how you properly use the words. You’re going to use ‘stocks’ when you’re talking about general ownership of companies, while you can use ‘shares’ to talk about ownership of one specific company.

Say you’re out with your buddies talking about your investment plan in general. If you tell them your plan has a collection of stocks, but you don’t make reference to any particular company in that plan, you’re correctly using the word ‘stock.’

If you then go on to talk about the share price performance of one of the companies in which you’ve invested, ‘shares’ is the right term. You can talk about the performance of your Apple shares (for instance) after the announcement of quarterly results as well as the impact of that on your investment plan.

That said, the term ‘stock’ has turned into an American way of referring to shares, so you’re not likely to confuse anyone if you do end up using the two words interchangeably.

T he difference between shares and stocks comes from what they mean for the ownership in a company. While ‘stock’ is a generic term used to refer to an industry overall, ‘share’ can be used to talk about ownership in a specific company.