For any financial market participant, the terms “stock” and “share” are like everyday terms. But have you ever taken a minute to understand that there is a difference between the two?
It might not be a very significant one, but the way it is used will make a lot more sense once you understand the difference.
So, this article will cover the difference between shares and stock in terms of their types and benefits.
What is a Share?
A share is a unit of ownership in a particular company. Suppose you own 100 shares of XYZ, Inc. Now, let’s say that the company has issued one lakh shares, which means that you own 0.1% of the company’s ownership.
Now, the more percentage ownership you have in a company, the more important your participation in the decision-making will matter. If you own 10% or more of the company’s shares, you receive the title of being a “principal stockholder.”
People who consider buying shares and investing in them earn interest concerning the investment amount. But this is just one benefit, another major motivation to invest in shares is to earn profits when the share prices of the company go up.
So, purchase it at a lower rate, earn interest while holding it, and then sell it at a higher rate to earn additional profits.
What is a Stock?
Stocks are the plural of share and represent part ownership in one or more than one company. Buying the stock of a company is like buying a percentage of ownership of the company.
It is financial security and as you invest in it, you will be receiving the stock certificate which is work as proof of your ownership in the firm and also have detail like how many shares you hold in the firm.
Since there is no limitation on the number of stocks you can hold in your portfolio, investors would buy the stocks of multiple companies with promising financials and are likely to grow in value.
And just like in shares, you will also earn benefits in the form of monthly, quarterly, semi-annually, or annual dividends.
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Shares Vs Stock: Key Differences
Types of Shares: There are two types of shares issued by the companies. The rights and features of the shares are significantly different, but the functionality remains the same.
Common Shares
The common shares are differentiated based on voting rights. They will be classified as Class A, Class B, and so on based on the voting rights they have.
Say, for example, that Class A may have 1 voting right per share and Class B has 5 voting rights per share.
Preferred Shares
The preferred shares are not very commonly traded as they are less popular among traders. The shares function like bonds and guarantee a dividend payment to their owners.
One major benefit of this security is that in case of solvency or any default on the company’s side, the preferred shareholders will get to have priority claims on the company’s shares.
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Types of Stock
The stocks also have similar types as shares, that is common stock and preferred stock. However, these stock classifications are further divided into the following categories:
- Income Stocks- These stocks are ideal for investors who are looking to have a consistent source of income. The best income stocks are those companies, that have a stable profit trend and have been in the stock market for quite some time. Utility companies are usually good income stocks.
- Blue-Chip Stocks- These stocks are a bundle of shares of big and well-known companies. These companies tend to have strong financial growth and profitable market performance. Investors usually go for these stocks because it brings reliability and big profits.
- Growth Stocks- Just like their name suggests these stocks tend to grow at a faster rate and earn higher than the market average. Now the catch with these stocks is that they do not provide a regular dividend, thus, the investors going for these stocks are looking for capital appreciation. The best example of these stocks is a tech startup.
- Value Stocks- These stocks tend to have a low P/E ratio thus, they are cheaper than other stocks. Investors choose to go for these stocks if they have a feeling that these stocks are undervalued. This way they will be able to earn profits when prices go up. Value stocks can be both Income stocks and growth stocks.
If needed these stocks can also be differentiated as large-cap, mid-cap, and small-cap stocks. This differentiation will depend on the size of the company. If any stock is from a small company and the stocks are low in price, then, they can also be called penny stocks.
Nominal Value
Stocks do not have a nominal value, shares on the other hand come with a nominal value attached to them.
Maximum number
As previously mentioned, there is no limit to the number of stocks you can hold in your portfolio. Depending on your financial needs, you can invest in as many as stocks needed.
The scenario from shares is slightly different. Even though there is no limit to the number of shares you can hold but there is a maximum ceiling on the number of shares that are available for trading. Thus, you will have to buy within that particular ceiling.
Transfer
Shares when bundled become stocks. Thus, if the investor feels like it, they can trade it in fractions. The shares on the other hand cannot be transferred in fractions but in lots.
Paid-up Value
Shares can only become stocks when they are fully paid, thus, stocks are fully paid up. But the same is not the case for shares. The shares can be partly or fully paid up.
Denomination
Since stocks in an investor’s portfolio will consist of a mix of shares from different companies, they can have different denominations.
However, the shares of a particular company will always have the same denomination. The only scenario in which the denomination might change is when the shares are split.
Benefit and Risk
The relation between the benefit and risk tends to go hand-in-hand when it comes to financial markets. But, how much risk you should take up for the benefit rendered depends on your financial requirements and appetite for risk.
Always keep in mind that stock prices are prone to fluctuations so a simple shift in the economic conditions and the stock might plunge. That is why, whenever you start investing, never forget to factor the risk into the investment decision.
Check the stock exchanges, and ensure that you sell when the share prices are high and buy when the prices are down. In case, there is not much movement, continue to hold onto it and keep reading the market.
Conclusion
The difference between shares and stock is subtle and at times the difference doesn’t even matter. What matters is how you trade in the market and if you have a solid investment strategy in place.
Once the strategy is set, you can invest in a single share or have a complete portfolio of stocks. Keep diversifying to be able to mitigate the systematic risk and hedge against inflation.
How you can safeguard your profits in the ever-volatile market is the key to a successful investing journey.
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