Whether you are a professional asset manager, a retail investor, or an absolute beginner, you are likely to be confused between the difference between the terms ‘stocks’ and ‘shares’, and by extension ‘stock market’ and ‘share market’. In fact, the vast majority of the population interchange the two terms.
In our previous article titled ‘difference between stocks and shares’, we did not cover the explicit difference between the stock market and the share market, which we will cover in this article.
Difference between stocks and shares
To summarize the above-mentioned article, a ‘stock’ is a representation of a small portion of a company; and by extension, a ‘stock certificate’ is your proof of ownership of that particular stock of the company that mentions the number of stock as well. On the other hand, a ‘share’ represents the number of units of stock.
For instance, you’d say you own Reliance Industries stock and have 500 shares of Reliance Industries.
If you have decided to purchase shares in a company as an investment, you become a ‘shareholder’ of the company. You can choose to own ‘common shares’ or ‘preferred shares’ depending on your choice of priority. If you hold preferred shares, you are not only guaranteed dividends but also guaranteed the first priority in the assets of the company in case of liquidation.
As a shareholder, you will reap the benefits of good corporate performance with an increase in your share value or through dividends. However, if the company’s performances decline, or fail altogether, you’ll be required to bear the losses as well.
Stocks typically refer to those instruments that can be traded in the cash market i.e. equities representing ownership of companies. Shares, on the other hand, can refer to a large group of instruments including proprietorship, limited-liability partnerships (LLPs), real estate investment trusts (REITs), mutual funds, exchange-traded funds (ETFs), etc.
Difference between stock markets and share markets
As the above paragraph summarizes, you will be able to purchase shares of only publicly-listed companies in a stock market. On the other hand, you can also invest in shares of exchange-traded funds, mutual funds, REITs, etc. in a share market.
A share market, hence, refers to any market where these shares can be bought and sold by interested parties. Interested investors can buy and sell shares of companies, ETFs, mutual funds, REITs, etc. with each other in a common environment.
On the other hand, a stock market is a marketplace infrastructure organized by a regulated body for enabling buyers and sellers to trade stocks as per convenience.
When one refers to the National Stock Exchange (NSE), Bombay Stock Exchange (BSE), NASDAQ, etc. they are referring to a stock market in particular, and not necessarily a share market. NSE and BSE are the largest stock exchanges in India, and they are controlled by a regulatory body known as the Securities and Exchanges Board of India, AKA SEBI.
A stock can only be bought or sold if it is listed on a stock exchange. Therefore, you can buy stocks of Tata Motors, Adani Ports, IDFC Bank, etc. but you can not buy stocks of Byju’s, UpGrad, Groww, CRED, etc. If you want to acquire ownership in these companies, you will have to participate in funding rounds led by venture capitalists or private equity firms. However, the bar for these funding rounds tends to be very high, and it is likely you will not have the capital to be able to invest in these businesses. The alternative solution would be to wait for their potential initial public offering (IPO).
While the terms ‘stock markets’ and ‘share markets’ are used interchangeably among experts as well, it is incredibly useful to understand the differences between them for increased awareness and higher quality investing choices.