Shares vs Stocks: Key Differences, Types and Investment Advice

‘Stocks’ and ‘shares’ are basic terms that as an investor you must understand before starting your stock market journey. However, the terms are often used interchangeably. But, there is a subtle difference between stocks and shares.

To some extent, it is true that they denote the same thing—an individual’s ownership in a public company. However, while the term ‘stock’ refers to part-ownership in one or more companies, the term ‘share’ has a more specific meaning. ‘Share’ refers to the unit of ownership in a single company.

Now, let’s delve further into the fundamentals of the stock vs share discussion.

What Is a Stock?

Stocks are financial securities that represent part-ownership in one or more companies. When you buy a company’s stock, you become a shareholder. The stock certificate serves as proof of ownership and mentions the number of stocks you hold. You can buy stocks of a single company or several companies. There is no limit on the number of stocks you can hold in your portfolio.

Many investors generally aim to buy the stocks of companies that are likely to increase in value. When such appreciation takes place, as a stockholder, you can sell the stocks and earn a profit. Apart from this, due to your part-ownership, you often receive a share of the company’s profits through monthly, quarterly, or annual dividend payments. Buying stocks is thus a lucrative way to make money. Plus, it reduces the impact of market inflation over a period.

What Is a share?

A share is the smallest denomination of a company’s stock. So, each unit of stock is a share, and each share of stock is equal to a piece of the company’s ownership.

Suppose Person X owns 100 shares of ABC Inc. Now if ABC Inc. has one lakh shares, it means X owns 0.1% of the company. Any person or entity with 10% ownership in a company, regardless of how many shares they hold, is termed a principal stockholder.

People who buy shares may earn interest on the money invested and dividends. But, that is just part of their motivation to invest in a company. Another reason is that their investment in the company pushes up the company’s value, which in turn increases its share prices. Shareholders can then sell these shares higher than their purchase price to make money on their investment.

Stock Vs Share: Key Differences

Here is a table that outlines the key differences between stocks and shares:

Types of Stock

There are mainly two kinds of stocks: common stock and preferred stock.

• Common stock: Common stock investors can vote at shareholders’ meetings. They also have a more directive stake in the company and receive company dividends regularly.

• Preferred stock: Preferred stockholders are not given voting rights. However, they receive dividend payments ahead of common stockholders. Investors in this category are given more priority over common stockholders if the company goes bankrupt.

Both common and preferred stocks fall under the following categories:

• Growth stocks: Stocks of this category grow and earn faster than the usual market average. As they rarely offer dividends, capital appreciation is what investors hope for. A start-up tech company may offer this type of stock.

• Income stocks: These stocks pay dividends consistently and help an investor to generate regular income. An established utility company’s stocks would be an example of income stocks.

• Value stocks: These usually have a low price-to-earnings (PE) ratio. So, they are much cheaper than those with a higher PE ratio. They could be either growth or income stocks. People buying value stocks expect the stock price to rebound soon.

• Blue-chip stocks: These are the shares of big, well-known companies with a solid growth history. Such stocks generally pay dividends. Blue-chip stocks are common among investors due to the reliability of the company. In addition, stocks can further be categorised by their market capitalisation and size. There are large-cap, mid-cap, and small-cap stocks. While shares of small companies are called microcap stocks, low-priced stocks are known as penny stocks.

Types of Shares

Under the Companies Act 2013, shares are broadly classified into two categories: oOrdinary equity shares and preference shares.

Ordinary equity shares are the most common type of shares issued by public companies. Shareholders enjoy voting rights, the ability to attend meetings, and a share in the company's profits. They may also benefit from surplus profits, but only after the company meets its obligations to preference shareholders.

Preference shares offer special rights, particularly regarding dividends and capital repayment in liquidation. Preference shareholders are paid dividends before ordinary shareholders and have their capital returned ahead of them if the company is liquidated.

Types of Ordinary Equity Shares:

1. Authorised Share Capital: Maximum capital a company can raise.
2. Issued Share Capital: Actual capital raised by issuing shares.
3. Subscribed and Paid-up Capital: Capital fully subscribed and paid by investors.
4. Voting vs Non-voting Shares: Voting shares allow decision-making participation; non-voting shares have limited or no rights.
5. Sweat Equity Shares: Compensation for employees' contributions.
6. Right and Bonus Shares: Issued to existing shareholders to maintain stake or as a dividend substitute.

Types of Preference Shares:

1. Redeemable vs Irredeemable: Redeemable shares can be bought back; irredeemable cannot.
2. Convertible vs Non-convertible: Convertible shares can become equity; non-convertible cannot.
3. Participating vs Non-participating: Participating receive extra profits; non-participating receives fixed dividends.
4. Cumulative vs Non-cumulative: Cumulative shares carry forward unpaid dividends; non-cumulative do not.

How Are Shares and Stocks Traded?

The terms "stocks" and "shares" are often used interchangeably, but they have distinct meanings that are important to understand. On exploring the stock and share market difference further, you will find that the stock market is a broader term consisting of the trading of stocks, which are collections of shares from different companies.

Major stock exchanges, such as the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE), facilitate the buying and selling of these shares. Shares and stocks are traded through brokers who act as intermediaries, allowing investors like you to place orders via online trading platforms.

Transactions are executed in real-time on these exchanges, making the process efficient and dynamic.

Primary vs Secondary Markets

When it comes to trading shares and stocks, it is quite important to understand the difference between the primary market and the secondary market, as both serve different purposes in the financial ecosystem.

• Primary Market – This is where companies issue new shares to the public for the first time through an Initial Public Offering (IPO). The funds raised go directly to the company for business expansion, debt repayment, or other purposes. As an investor, you buy shares directly from the issuer.

• Secondary Market – Once shares are listed on a stock exchange, they are traded in the secondary market. Here, you buy and sell shares among other investors, and the company does not receive any money from these transactions. Popular stock exchanges like the NSE and BSE facilitate this trading.

To quickly summarise the role and differences

Benefits and Risks of Trading in Stocks

For someone with a long-term goal, investing in stocks is a great way to get capital appreciation. Young investors saving for the long haul can get positive returns by investing in stocks.

However, stock prices can plunge as well. Besides, there is no assurance that the company stocks you hold will grow and perform well. That is why it is important to factor in the potential risk before investing. And only invest what you can afford to lose.

The stock price of a company may fluctuate multiple times a day. Market fluctuations could be a factor when investing in stocks. In addition, the stock price can take a hit for various reasons including, internal and external factors like global, political or economic issues.

If you sell your shares below the price you paid, you will lose money. But if you hold on until the price goes up, you could pocket a nifty profit.

Example of Stock Price Fluctuation

Suppose you buy 100 shares of XYZ Ltd at ₹85 (100 x 85= ₹8,500) in the past week. The very next day, the stock price declines to ₹75. As a result, the total value of your shares stands at ₹7,500 (100 x 75) against the past value of ₹8,500. If you were to sell the shares, your total loss would be ₹1,000. But a week later, the stock price crosses your purchase price and stands at ₹90. This brings the total value of your shares to ₹9,000 (100 x 90). If you sell the shares now, you will pocket an overall profit of ₹500.

Benefits and Risks of Trading in Shares

Trading in shares offers several benefits but also comes with risks. The primary benefit of trading in shares is the opportunity for capital appreciation, where the price of shares increases over time, allowing you to earn profits.

Additionally, shares offer regular income through dividends, which companies distribute from their profits to shareholders. Investing in shares provides an opportunity for long-term wealth creation and helps build a diversified investment portfolio.

However, there are also risks associated with trading in shares. The stock market is highly volatile and share prices can fluctuate rapidly based on economic conditions, company performance, government policies, and market sentiment.

You may also face risks of losing capital, especially in the case of poor-performing companies or during market downturns. Trading in shares requires careful analysis, market knowledge, and a solid investment strategy to mitigate risks and maximise returns.

How Do Investors Make Money in Stocks and Shares?

Investing in stocks and shares is known to be riskier compared to fixed investments, but it also offers the potential for the highest returns. If you have already invested, you can earn money in two main ways:

1. Selling shares: One primary method of earning is through selling shares at a higher price than you paid. The difference between your purchase and sale price represents your profit. This is a fundamental way to make money in stock vs share market.

2. Dividend earnings: Some companies distribute a portion of their profits to shareholders in the form of dividends. While not all stocks or shares provide dividends, those that do typically pay them quarterly, offering a source of passive income for shareholders.

Note that to maximise your earnings, understanding the stocks and shares differences is crucial..

Get Your Stock Investment Right

You now know the basics of stocks and shares. So why not dive into the world of stock market investment? The market offers a wealth of opportunities for both stocks and shares. Here are some tips to help you get it right:

• Safeguard your portfolio through diversification: Diversification is a crucial strategy to protect your investment from unnecessary losses. By spreading your investments across different asset classes like stocks, bonds, and even mutual funds, you reduce your exposure to any one underperforming asset. You can diversify within the stock market by investing in different sectors, such as banking, technology, and consumer goods, or in different types of shares, such as blue-chip stocks or mid-cap companies.

• Plan your investment to prevent losses: Avoid chasing every hot tip or market trend. Instead, pick around eight to ten well-researched stocks and shares. Look at the fundamentals, such as earnings, revenue growth, and debt levels, and study technical charts to understand price movements. You can monitor the movements of shares in popular indices like the Nifty 50 or Sensex to get a sense of the overall market trend. By keeping an eye on key indicators, you will know when to enter or exit a stock or share.

• Invest online through an online broker: Buying stocks and shares is way simpler than before, thanks to online brokers. To start, open a demat and trading account, both of which are required for holding and transacting shares. You will also need to complete KYC formalities. Once set up, you can buy and sell stocks or shares in real time, using an easy-to-navigate platform. Choose a broker with low fees, a user-friendly interface, and solid customer support to get started with your investments in the stock market.

By following these steps, you can confidently manage your stock and share portfolio, reduce risks, and make well-informed investment decisions.

Common Misconceptions About Stocks and Shares

Despite the growing popularity of stock investments, several misconceptions continue to persist. These myths can prevent potential investors from entering the market or making informed decisions. Here are some common misconceptions:

1. Stocks and shares are only for the rich: Many believe that investing in stocks is reserved for the wealthy. However, anyone can start investing with a small amount, thanks to low minimum investment requirements and an open access to online platforms.
   

2. Stock market is a quick way to get rich: Many think that stocks guarantee quick profits. In reality, the stock market requires patience, research, and long-term strategies for consistent returns.
   

3. Investing in stocks is too risky: While there is risk, it can be minimised with careful research and diversification. You can spread your risk by investing in various sectors or using mutual funds.
   

4. You need to time the market: Trying to time market movements is nearly impossible. It is better to focus on strong, fundamentally sound stocks and stay invested long-term to benefit from compounding.
   

Summing Up

The difference between stock and share is subtle. In most cases, the difference is not really significant. But you must know all sides of the stock vs share argument before taking the plunge into equity investments. Once you have an investment strategy in place, you can buy individual shares and build a portfolio of stocks. Just remember to diversify your portfolio always and monitor your short-and-long-term stock selection. This will safeguard your investments even when the markets are volatile.