‘Stocks’ and ‘Shares’ are basic terms that investors should understand before embarking on the journey of the stock market. However, the terms are often used interchangeably. And not many people know that there is a subtle difference between a stock and a share.
To some extent, it is true that they denote the same thing—one person’s ownership in a public company. However, while the term ‘stock’ refers to partial-ownership in one or more companies, the term ‘share’ has a more specific meaning. ‘Share’ refers to the unit of ownership in a company.
Now, let’s delve deeper into the essentials of the stock versus stock argument.
What is stock?
Stocks are financial securities that represent part-ownership in one or more companies. By buying shares of a company, you become a shareholder of that company. Stock certificate acts as a proof of ownership and mentions the number of stocks you hold. You can buy shares of a single company or multiple companies. There is no limit to the number of stocks you can hold in your portfolio.
In general, investors want to buy shares of companies that have the potential to increase in value. When such appreciation occurs, the shareholder can sell the stock and make a profit. In addition, as a result of their share-ownership, shareholders often receive a portion of the company’s profits in the form of monthly, quarterly or annual dividend payments. Thus buying stocks is a lucrative way to make money. Also, it reduces the effect of market inflation over a period.
What is share?
A share is the smallest denomination of a company’s stock. So, each unit of stock is one share, and each share of stock is equal to one piece of company ownership.
Suppose a person X owns ‘100 shares of ABC Inc.’. Now, if ABC Inc. has one million shares, it means that X owns 0.1% of company. Any person or entity with 10% ownership in a company, regardless of the number of shares they hold, is called a principal stockholder.
People who buy shares can earn interest on the money invested along with dividends. But it is only part of his motivation to invest in a company. The second reason is that their investment in the company increases the value of the company, which in turn increases its share prices. The shareholders can then sell these shares for more than their purchase price to make money on their investment.
Stock vs Share: Key Differences
Here are some essential points of difference between stock and share:
Definition: ‘Stock’ represents the share-ownership of the holder in one or several companies. Meanwhile, ‘share’ refers to a single unit of ownership in a company. For example, if X has invested in stocks, this could mean that X has a portfolio of stocks in different companies. But if X has invested in shares, the next question should be focused on ‘which company’s shares’ or ‘how many shares’.
Ownership: When a person owns shares of several companies, you can say that he has stock. But if someone has bought shares of a particular company, then they have only the shares.
Denominations: Individuals who are holding stocks have the option to choose different stocks of different denominations. Those who own shares in a specific company can certainly own multiple shares. But the shares will be of equal or equal value.
Paid-up Value: Stocks are always fully paid-up in nature. However, the shares can be either partially or fully paid-up.
Nominal Value: This is the value assigned to each share at the time the stock is issued. This is different from the market price which varies depending on the demand and supply of shares.
Investment Type: Shares can refer to a large group of financial instruments known as securities. These can include mutual funds, exchange-traded funds (ETFs), limited partnerships, real estate investment trusts, etc. But stocks specifically refer to corporate equities and securities traded on a stock exchange.
There are mainly two types of stocks: common stock and preferred stock.
Common Stock: Common stock investors have the right to vote at shareholders’ meetings. They have a more direct stake in the company and receive company dividends at regular intervals.
Preferred Stock: Preferred stockholders are not granted voting rights. However, they receive dividend payments before common shareholders. This category of investors is given higher priority than common shareholders if the company goes bankrupt.
Both common and preferred stocks fall into the following categories:
Growth Stocks: Stocks in this category tend to grow and earn faster than the general market average. As they rarely offer dividends, capital appreciation is exactly what investors expect. A start-up tech company may offer these types of shares.
Income Stocks: These stocks pay consistent dividends and help an investor to generate regular income. An example of an established utility company stock would be income shares.
Value stocks: These generally have low price-to-earnings (PE).
ratio. They can be either growth or income stocks. Those who buy value stocks expect the stock price to rebound soon.
Blue-chip stocks: These are stocks from large, well-known companies with a solid growth history. Such stocks usually pay dividends. Blue-chip stocks are common among investors because of the company’s credibility.
In addition, shares can be classified on the basis of their market capitalization and size. There are large-cap, mid-cap and small-cap stocks. While shares of smaller companies are called microcap stocks, stocks with lower prices are known as penny stocks.
type of shares
Companies can issue different types of shares depending on their rights and characteristics. Two well-known types are common shares and preference shares.
Common Stock: A common stock is a basic type of stock that can be classified into different categories based on voting rights. For example, take the case of Class A and Class B shares. Class A common shares may come with one voting right per share. But Class B shares can get 10 voting rights per share.
Preference Shares: Preference shares are a less popular type of shares that function similarly to bonds. They give guaranteed dividend payouts to their holders. They also ensure priority claim on the assets of the company in the event of the company going out of business.
benefits and risks
For someone with long-term goals, investing in stocks is a great way to get capital appreciation. Young investors who are saving for long term can get positive returns by investing in stocks.
However, share prices may also decline. Furthermore, there is no assurance that the company stock you own will grow and perform well. Therefore, it is important to keep the potential risk in mind before investing. And never invest more than you can afford to lose.
The share price of a company can fluctuate several times a day. Market volatility can be a factor when investing in stocks. In addition, the share price can be influenced by a variety of factors, including internal and external factors such as global, political or economic issues.
If you sell your shares for less than what you paid for, you will lose money. But if you hold till the price rises, you can make profit in Nifty.
stock price volatility example
Suppose you bought 100 shares of XYZ Ltd last week at Rs 85 (100 * 85 = Rs 8,500). The very next day, the share price drops to Rs.75. Now, the total value of your shares is Rs 7,500 (100 * 75) against the previous value of Rs 8,500. If you sell the shares, your total loss will be Rs 1,000. But after a week, the share price exceeds your purchase price by Rs 90. This brings the total value of your shares to Rs 9,000 (100 * 90). If you just sold the shares, you would have made a total profit of Rs.500.
How do people make money in stocks?
It is well known that stocks are riskier than any other fixed investment. But they also have the potential to yield maximum returns. Have you already invested in stocks? You can earn in two ways: by selling shares and through dividend income.
- Selling Shares: You will need to sell the shares for more than what you paid for them. The price difference will be your profit.
- Dividend Income: Companies send regular payments to their shareholders in the form of dividends. Although not all stocks offer dividends, they usually pay out on a quarterly basis.
Get Your Stock Investing Right
Now you know the basics about stocks and shares. So, why not foray into the world of investing in the stock market? Here are some tips to help you fix it:
- Protect your portfolio through diversification: It helps in protecting your investments from depreciation. To diversify your portfolio, simply spread your investments across different asset categories. Then if an asset performs poorly, you can re-tune your strategy to protect against further losses.
- Plan your investments to prevent losses. Instead of chasing every promising stock, choose eight to 10 stocks to add to your portfolio. Then follow fundamental and technical research on these stocks and keep an eye on the market movements. This will help you spot patterns and know when to buy or sell scrips.
- Invest online Buy individual stocks through an online broker: All you need to do is open a demat and trading account. Simply fill in an application form and complete the Know Your Customer (KYC) formalities. When shopping for an account, browse through the types of accounts offered by trusted brokerage firms like Kotak Securities.