Shares vs. Stocks: What's the Difference?

When an individual decides to begin stock trading, he/ she must first be aware of the differences between shares and stocks. In many countries, people may use these terms interchangeably. While it is true that both terms denote ownership in a company, there are minor differences between these terms.

Stock is a broad terminology used to denote a unit of ownership in one or multiple companies. However, the term share indicates a person's stake in any company in the market.

The following sections of this blog will cover the essential details.

What is a stock?

Generally, when a company seeks to raise capital, it issues stocks or borrows money. Stocks are financial securities representing ownership in corporations. To be precise, when a person buys stocks, they buy a percentage of a company’s ownership.

Investors can receive their stocks’ dividends, which depend entirely on the company’s earnings and profits. Usually, people receive dividends monthly, quarterly, or annually from their investments. Dividends are declared after approval from the company’s board of directors.

What is a share?

The smallest denomination of a particular company’s stock is called a share. In other words, the stocks of a company get divided into shares, i.e., a unit of a stock is a share.

Suppose a company has 1 lakh shares. An investor holds 100 shares of the company. It means that the investor owns stock equal to 0.1% of the company’s total stock. Here, a share stands for a single unit of the stock.

Difference between shares and stocks

This section will focus on the differences between stocks and shares:

Additional read: What is share market

Types of stocks

Listed below are different types of stocks:

• Large-cap stocks
  Stocks of reputed and established companies with substantial amounts of cash at their disposal, are referred to as large-cap stocks.
• Mid-cap stocks
  Stocks of medium-sized companies are called mid-cap stocks.
• Small-cap stocks
  These stocks belong to small companies with low market capitalisation.
• Common stock
  Represents an ownership stake in a company, affording shareholders the right to vote on key decisions and potentially receive dividends. However, common stockholders stand last in line for company assets in the event of liquidation.
• Preferred stock
  Exhibits characteristics of both equity and debt. Although it typically lacks voting rights, preferred stockholders hold a higher claim on a company's assets and earnings compared to common stockholders. Dividends for preferred stock are usually fixed.
• Growth stocks
  Belong to companies poised for above-average growth in revenue, earnings, and cash flow. These stocks often prioritize reinvesting earnings into the business rather than distributing dividends to investors.
• Blue-chip stocks
  Denotes shares of large, well-established companies known for financial stability and reliability. Blue-chip stocks are often considered safer investments, having demonstrated a history of consistent performance.

Type of shares

One can categorise shares into two types:

• Equity shares
  Companies issue equity shares to raise capital. These shares can be further categorised into authorised share capital, issued share capital, and others.

• Preference shares
  Preference shares enable the owners to receive preference over equity shareholders at the time of capital reimbursement and dividend distribution.

Benefits and risks

Here are the benefits of investing in stocks and shares:

• Investing in stocks ensures portfolio diversification
• Stock investments are a good source of dividend income which helps to grow a substantial corpus
• One can liquidate stocks with ease
• Stocks hold the potential to generate high returns over a short time

The primary risks of investing in stocks are as follows:

• Market risk- Stock prices depend on supply and demand in the market. It is subject to daily fluctuations
• Company risk- Stock prices can fall if the company undergoes financial problems
• Liquidity risk– A company facing liquidity/ solvency problems may find it difficult to repay debts and may not generate dividends

Additional Read: Difference between stocks and ETFs

How do people make money with stocks?

There are two ways by which people make money through stocks:

• People can engage in a ‘buy and hold’ strategy where they remain invested for a longer timeframe and sell them at a high price to make capital gains
• The other way to earn money from stocks is to receive dividends paid by the company to shareholders

The strategic step is to formulate the right investment strategies, resulting in success with stock investments. One must evaluate their risk profile and decide on the investment horizon.

Investors must conduct thorough research before purchasing stocks. Often, people make the mistake of opting for an investment resulting in losses they cannot afford. Financial experts keep emphasizing that investors must invest their surplus funds only. It is a bad idea to borrow money for investment purposes.

Even though the two financial terms are often used interchangeably, there are differences between shares and stocks. The differences may be too small for most people, but one must understand the concepts before investing in them.

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