What’s the Difference Between Stock and Share?
S tocks and shares are often used interchangeably when speaking in general terms, but they have differences worth noting. A stock is a broader concept used to describe ownership of certificates of any company. At the same time, a share refers to the individual units of ownership of certificates in a particular company.
- “Stock” is a more general term that refers to ownership of certificates of any company, while “share” refers to ownership of certificates of a particular company.
- Stocks refer to equity ownership in a company. There are many different types of stock.
- Shares represent the individual slices of ownership. There are two classifications of shares.
- Stake refers to the percentage of a company’s shares a stockholder owns.
- Diversification is always an essential consideration for your stock portfolio.
Stocks Vs. Shares
Both stock and share refer to the stock certificate, but the term stock applies to any company, while shares apply to a particular company. Stock is also used in general terms, such as large- and small-cap stock. Stock typically refers to common stock. Preferred stock is a share.
There are a few other critical points of difference between stocks and shares:
- Stocks are a group of shares of one or multiple companies. It’s a much more general term that doesn’t describe the size of the investment.
- Shares are the smallest unit of ownership of a company. Shares also measure the size of an investment in a company that someone owns.
- A stock is a collection, while shares are a small part of something bigger.
- Shares represent ownership, while stocks are a simple grouping of shares in a company.
- When a company completes its initial public offering (IPO) and is listed, it changes its shares into stocks.
- A company can convert its fully paid shares into stock.
- Shares are in equal denominations, while stocks are in different denominations. Shares can’t be transferred into fractions, but stocks can be divided.
Stocks and Stockholders
Stock are securities that represent ownership in a company. Stockholders are owners of a percentage of a company and have a claim on a company’s assets and profits. A portion of the profits is returned as dividends. Owning stock also provides voting rights. An individual stock is known as a share. Stockholders in a company could hold one share or one million shares.
Stocks have numerous classifications, including tech, small- and large-cap, and blue-chip stocks. The classifications refer to the companies rather than the stocks themselves. Common stock and preferred stock are types of shares.
Stocks are categorized by market capitalization according to company size:
- Nano-cap stock is from companies that have a value of under $50 million. Micro-cap companies have a value of between $50 million and $300 million. Such stocks are also referred to as penny stocks. Micro- and nano-cap stock companies often specialize in niche products and services that may not be known by the general public. Nano- and micro-cap stocks are relatively neglected by analysts and can offer more growth opportunities for value investors. They also offer lower prices, which means more ability to acquire a higher number of shares. This category of companies has risks of high volatility and failed execution of business plans.
- Small-cap stock is from companies that have a value between $300 million and $2 billion. This category of companies has risks of being newer, smaller, and serving smaller or newer industries. Small-cap companies are also at higher risk during economic downturns. Stock prices are more volatile, but with higher risk may come higher rewards in investing.
- Mid-cap companies are valued between $2 billion and $10 billion. These companies are smaller and more agile in making decisions quickly to take advantage of changes in the economy. They may also have limited analyst and investor following, opening opportunities for investment growth. Smaller companies have fewer resources to sustain themselves during economic downturns.
- Large-cap companies are valued between $10 billion and $200 billion and are significant players in established industries. This category of companies has lower short-term returns but long-term advantages, including long-term growth of share value and dividends.
- Mega-cap companies have a value of over $200 billion and have strong brand recognition globally. Mega-cap stocks have such high market value that they’re in a position to lift or drop a stock index based on their performance. Investors look for consistent dividends and steady returns on their investments.
Shares and Shareholders
Shares represent individual slices of ownership in a company. Shareholders gain more influence in a company by owning more shares. Dividends and voting rights are on a per-share basis. The number of shares provides information about investment size.
Companies issue different types of shares, but common shares are issued most often. Common share prices are the ones listed on a company’s ticker. Preferred shares, which are issued in smaller quantities, function like bonds because they provide a guaranteed dividend and give holders a priority claim on a company’s assets should it go out of business. Preferred shares usually don’t include voting rights, though. Companies may issue different classes of shares with different privileges. For example, Class A shares could carry fewer votes than Class B shares, enabling founders and families to retain control while selling stock.
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Stake In a Company
Stake describes the amount of a company’s stock an investor owns, usually in a percentage. While stake can refer to ownership of a portion of a company’s stock owned by an individual, it can also show partial ownership in a privately held company. Bondholders are also considered stakeholders in a company because they benefit if a company does well. Bondholders have a stake in a company by owning its debt through bonds ranging from high-grade to junk bonds according to the company’s credit rating.
Stockholders, shareholders, and stakeholders of a public company are essentially the same. The terms stockholder and shareholder are virtually interchangeable; both refer to owners of shares of stock in a company.
The Importance of Diversification of Stocks
Diversification is key to managing risk and riding out market volatility. Careful research can reduce risk in an individual investment, but diversification into different industries and asset classes would be affected differently by adverse events.
Diversification is especially crucial for long-term investments. Compound growth over time and avoiding large losses are critical to long-term investment success.
Investors need to consider two different types of risk: undiversifiable (systematic or market risk) and diversifiable (unsystematic).
Undiversifiable risk cannot be mitigated and includes inflation rates, exchange rates, war, and interest rates. This type of risk affects the entire market.
Advantages of Diversification
Diversifiable risk applies to specific companies, industries, markets, economies, or countries. This risk can be reduced by spreading investments across different companies, industries, and other categories. Diversified investments limit exposure to adverse events at the company, market, or industry level.
The more uncorrelated investments are, the better. Adverse events could affect entire asset classes like transportation, so it’s safest to diversity in different industries. Market drops could affect entire industries but leave other industries unscathed.
Keep diversity in asset classes and geographic location in mind as well. Mixing stocks and bonds can lessen the blow of hits to the market. Investing in foreign stock can have similar mitigating results.
Diversification can also open more opportunities to recoup losses as markets return after a drop in value. It can also open you to unexpected profits in areas you otherwise would not have owned an investment. It can be difficult to keep money in assets that don’t appreciate as quickly as others, but those investments can protect you and do unexpectedly well in the future.
Disadvantages of Diversification
Diversification may make portfolio management cumbersome. It can also be more costly to purchase different investment vehicles that may not have the same returns as the higher-risk assets that are the focus of your portfolio. Mutual funds and other investment vehicles have more fees than stocks.
Investors also exchange higher rewards for lower risk. Bonds are the most popular hedge against losses since they typically do better when stocks are losing value, but overall they have less return on the investment dollar.
Even the most careful research on a company can’t protect its investors against losing their money. Diversification can help reduce the impact of unexpected losses in individual stocks or entire market categories.
B oth stocks and shares are essential terms with diverse categories that illustrate their differences. Both show ownership in a company. They are used interchangeably when referring to company ownership and stock markets. The main difference between the two terms is that a share refers to pieces of ownership of a single company, and a stock refers to the ownership of a collection of shares. Shares show the investment’s size, while stock is a more general term.