‘Stocks’ and ‘shares’ are terms that almost everybody uses interchangeably, whether they are professional hedge fund managers, traders, retail investors, or non-participants in the stock market. Most people are not even aware of the subtle difference between the terms, and knowing the difference between the two terms could be beneficial in your understanding of the stock market.
What are stocks and shares?
Although used interchangeably, you will have noticed specific instances of how share and stock can have different meanings. For instance, if you say “I have some shares”, you might get asked back “shares of which company”. On the other hand, if you say “I have some stocks”, it’s likely understood that you have a bunch of shares of one company or multiple companies. And this is the primary difference between shares and stocks concerning day-to-day communication.
In simple words, a ‘stock’ represents a small part of a company that you own. The ‘stock certificate’ is the proof of ownership of the stock you own and mentions the number of stock as well. On the other hand, a ‘share’ represents the number of units of stock. You own Tata Motors stock, and you have 500 shares of Tata Motors.
Other differences between stock and share
- Denomination: You can choose to own different stocks having different values. However, you can own shares of a specific company of only the same or equal value.
- Paid-up value: While stocks are always fully paid-up, shares can be either partly or fully paid-up.
- Kind of investment: ‘Stocks’ refer to the entities traded in the spot market i.e. equities representing company ownership. ‘Shares’ on the other hand, can refer to a large group of financial ownership instruments including proprietorship, limited-liability partnerships (LLPs), real estate investment trusts (REITs), mutual funds, exchange-traded funds (ETFs), etc.
There is also a clear difference between stocks and shares in the categorization of both terms.
Types of Shares
There are two kinds of shares that every investor can have ownership of, and these shares are:-
- Common shares:- This is the most basic kind of share that investors can purchase directly from the share market. If you have bought 500 shares of Tata Motors from the share market, you are likely to own 500 common shares of Tata Motors.
Some companies can also have different categories of common shares that are classified on voting rights. The most famous example of this is the American multi-billion dollar conglomerate Berkshire Hathaway that has Class A shares and Class B shares. The Class A shares are worth $435,175 and the Class B shares are much cheaper at $288. However, the Class A shares come with 10 voting rights per share, while Class B shares come with only 1 voting right per share.
Note:- as far as capital gains are concerned, it does not matter whether you choose Class A shares or Class B shares.
- Preferred shares:- This is a less popular kind of share where the functionality can be compared to bonds, i.e. preferred shareholders are guaranteed to receive dividend payment at the end of each financial quarter. Preferred shareholders are also given priority on the assets of the company in case of liquidation.
Types of Stocks
Broadly speaking, stocks can be classified into common stocks and preferred stocks as well, just like shares. Common stocks are the most basic kind of stock that investors can purchase directly from the stock market, while preferred stocks work similarly to bonds. Preferred stockholders are guaranteed to receive dividend payments at the end of each financial quarter and are given priority on the assets of the company in case of liquidation.
Common stocks and preferred stocks can both be classified under the following categories based on the size or performance of the underlying companies.
- Growth stocks: These are the stocks of a company that is in its growth/expansion stage. Share prices of these stocks are likelier to grow at a faster rate than the market average or the national index. Growth stocks aim for a good capital appreciation over dividend income. The small-cap and mid-cap sectors of the economy are filled with potential growth stocks that can deliver multibagger returns.
- Income stocks: These are the stocks of a company that has earned a higher profit than it knows what to do with, and in return pays dividends to shareholders consistently and can provide an investor with a regular income source (hence, called income stocks). These companies are usually well-established in their industries and aren’t looking forward to an expansion or growth plan anytime soon. The stocks of a utility company or insurance company are examples of income stocks.
- Value stocks: Value stocks can be classified as either growth or income stocks. The concept behind these kinds of stocks is that they are not valued highly by the market, i.e. they are undervalued relative to their performance, and hence you buy these shares expecting the price to rebound to a better valuation. These stocks are typically identified by a low price-to-earnings (PE) ratio.
- Blue-chip stocks: These are the stocks of relatively bigger and well-known companies that have already gone through a massive growth story and are one of the most reputed names in their industries. Prominent examples in the Indian stock markets include Reliance Industries, Tata Steel, Infosys, ICICI Bank, Hero Motocorp, etc. These stocks are likelier to pay dividends as well. As businesses do not have one working formula, blue-chip stocks can also be a growth stock, income stock, or value stock.
Benefits and risks
The short-term volatility of the stock markets is what provides the benefits as well as risks of investing in stocks or shares. However, investors who are in the game for the long run can make sizeable returns from stocks they have invested in, provided they have done their research and due diligence while stock picking.
While the terms ‘stocks’ and ‘shares’ can be used interchangeably, it is important to understand the difference between them to make better investing choices. Once you learn the difference, you can start buying up shares in your chosen companies and build a healthy portfolio of stocks.