As a new investor, you may have heard someone use the terms ‘shares’ and ‘stocks’ on more than one occasion. Many new investors consider these two terms to be the same; however, there is a difference.
Investors new to the market and unsure what a share is often overlook one of the most basic concepts of the market, the difference between shares and stocks. In this guide, we will be answering the question, what is share, also explaining how stocks work, the different kinds of shares, and the meaning of being a shareholder, in a simple manner.
What Is Share?
When we talk about shares, we are talking about pieces of ownership in a company. Every company needs to find a way to obtain more money to be able to grow. They may want to build new factories, develop a new product, pay off some debts, or all of the above. To do this, a company will split its ownership up into several pieces, which it calls shares, and sell these pieces to the public.
Example
If a company has 100,000 shares and you own 1,000 shares, you own 1% of that company.
As a shareholder, you may be entitled to:
- A portion of profits (dividends).
- Voting rights in company decisions.
- Capital appreciation if the share price increases.
In short, as an owner of a share, you own a part of the company.
What is a Stock?
To explain the meaning of stock, I will first break down the term.
Stock is a more general term in that it represents ownership in one or more companies, and it is not referring to one single company. If a person has said any of the following: “I invest in stock,” they probably mean to say they invest in or own shares of several companies.
Idea Summary:
- A share represents ownership in one company.
- Stock represents ownership in several companies.
Because of this distinction in meaning, it is common to hear of a 'stock market', which essentially refers to the market in which shares of numerous companies are bought and sold.
Stock and Shares: Differences
Comparing the definitions of stock and shares side by side will help to clarify the meaning of the two terms.
|
Basis |
Shares |
Stocks |
|
Meaning |
Unit of ownership in one company |
Ownership in companies overall |
|
Usage |
More specific |
More general |
|
Example |
100 shares of Reliance |
Portfolio of tech stocks |
|
Scope |
Individual company |
Multiple companies |
|
Common Term |
Used in accounting |
Used in investing |
In simple words, Shares are specific, Stocks are collective.
Types of Shares Explained
Understanding the types of shares is essential for investors because not all shares offer the same rights or returns.
1. Equity Shares
Equity shares represent true ownership in a company. These are the most common shares traded in the stock market.
Features:
What most people mean when they talk about investing in shares.
2. Preference Shares
Preference shareholders get priority over equity shareholders when it comes to dividends.
Features:
- Fixed dividends.
- No or limited voting rights.
- Lower risk than equity shares.
- Less price fluctuation.
3. Bonus Shares
Companies issue bonus shares to current shareholders free of charge, depending on how many shares they already have.
4. Rights Shares
A rights offering gives current shareholders an opportunity to buy more shares at a lower price, so they do not lose any control of the company.
What Is a Shareholder?
Shareholder meaning is more than just owning shares.
A Shareholder is:
- A part-owner of the company.
- A person involved in the growth of the company.
- An investor with profits and losses.
Shareholder Rights:
- Right to a dividend.
- Right to vote in company annual general meetings.
- Right to information about the company.
- Right to increase in company value.
Shareholders face:
- The level of risk in the stock market.
- The level of risk in the company.
- The level of risk in the government and the economy.
What Is Equity Shares?
Equity shares are the foundation of the stock market.
Importance of Owning Equity Shares
Equity shares signify the final stage of ownership; they indicate that the buyer has final claim over all the assets of the company after everyone else has been paid.
A company’s growth directly benefits its equity shareholders. Over a prolonged period, investments in equity shares offer a hedge against inflation.
Equity Shares Compared To Other Assets:
- High risks compared to fixed deposits or bonds.
- Provides more significant long-term gains against most other investments.
- Best for long-term wealth creation and investments.
- When someone mentions they invest in stocks, they are typically referring to equity shares.
How Shares/Stocks Function in the Stock Market
The stock market is a system where buyers and sellers trade shares.
The Process:
1. A company offers its shares for the first time in an IPO.
2. Shares are then traded on stock exchanges.
3. Pricing is controlled by the demand and the supply.
4. Investors make profit through:
Dividends
Appreciation of the stock price.
Basic Principles Of A Stock Market:
- Stock values can change every day.
- The risk of volatility is minimised by long-hold strategies.
- In the long-term, the company’s fundamentals are more important than the market’s short-term price fluctuations.
Why is It Important for Investors to Grasp the Distinction Between Shares and Stocks
Many novice investors tend to overlook fundamental concepts and they become confused. Knowing how to distinguish between shares vs stockscan help you:
- Talk to your broker and financial advisor better.
- Understand paperwork related to your investments.
- Create a balanced investment portfolio.
- Make better choices financially.
For example:
"Buying stocks" can refer to different companies.
"Buying shares" means you own a specific amount.
Common Myths About Shares and Stocks
Myth 1: Shares and stocks are the same
While many consider these terms interchangeable, they are not. Stocks are general, and shares are specific.
Myth 2: Share ownership is only for wealthy people
Any stock priced affordably enables small investors to buy shares in the company.
Myth 3: Dividends are guaranteed for all shareholders
Dividends can only be paid if the company makes a profit, and it may decide not to disburse dividends regardless of profitability.
Myth 4: The stock market is a complete gamble.
Most people view investing as gambling; however, it is not true.
Final Thoughts
Knowing the basics of what a share is and how it differs from stock is the first step in a smart investment strategy.
Takeaways:
- Ownership in a single company is represented by shares.
- Stocks signify ownership in multiple companies.
- Equity shares present potential growth opportunities, but also present risks.
- A shareholder is a person who owns a portion of a business.
The best defense against beginner mistakes is to grasp the basics. To invest effectively, you must grasp the fundamentals. You will become more comfortable interacting with the stock market as you gain experience.
DISCLAIMER: This blog is NOT any buy or sell recommendation. No investment or trading advice is given. The content is purely for educational and information purposes only. Always consult your eligible financial advisor for investment-related decisions.
