Stock vs share: Key differences, types and investment advice

Stocks’ and ‘shares’ are basic terms that investors must understand before starting their stock market journey. However, the terms are often used interchangeably. But, there is a subtle difference between stock and share.

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.

Investors generally aim to buy the stocks of companies that are likely to increase in value. When such appreciation takes place, the stockholder can sell the stocks and earn a profit. Apart from this, due to their part-ownership, stockholders 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 a 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 are some important points of difference between stock and share:

• Definition: ‘Stock’ represents the holder’s part-ownership in one or several companies, while ‘share’ refers to a single unit of ownership in a company. For example, if X invests in stocks, it means that X has a portfolio of shares across different companies. But if X invests in shares, the key questions are ‘shares of which company’ or ‘how many shares.’

• Ownership: When an individual owns shares of several companies, you can say they own stocks. But if someone bought shares of a specific company, they only own shares.

• Denomination: Individuals who own stocks have the option to choose different stocks of different values. Those who own shares in a specific company can, of course, own multiple shares. But the shares will only be of the same or equal value.

• Paid-up value: Stocks are always fully paid-up in nature. However, shares could be either partly or fully paid up.

• Nominal value: This value is assigned to each share when the stock is issued. It is different from the market value, which varies based on demand for and supply of the shares.

• Kind of investment: Shares can refer to a large group of financial instruments known as securities. They can include mutual funds, exchange-traded funds (ETFs), limited partnerships, real estate investment trusts, etc. But stocks mainly refer to corporate equities and securities traded on a stock exchange.

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.

Benefits and risks

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 declined 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 sold the shares now, you would pocket an overall profit of ₹500.

How do people make money in stocks?

It is well known that stocks are riskier than any other fixed investments. But they also carry the possibility of fetching the maximum returns. If you have already invested in stocks, you can earn in two ways:

• Selling shares: You will need to sell the shares for more than what you paid. The price difference would be your profit.

• Dividend earnings: Companies send regular payments to their shareholders in the form of dividends. Though not all stocks offer dividends, those that do usually pay every quarter.

Get your stock investment right

You now know the basics about stocks and shares. So why not dive into the world of stock market investment? Here are some tips to help you get it right:

• Safeguard your portfolio through diversification: This helps protect your investment from depreciation. To diversify your portfolio, spread your investment across different asset categories. Then, if one asset performs poorly, you can re-tune your strategy to safeguard against further loss.

• Plan your investment to prevent losses: Rather than chase after every promising stock, choose eight to 10 scrips to add to your portfolio. Then, go over the fundamental and technical research on these scrips and monitor market movements. This will help you spot patterns and pinpoint when to buy or sell a scrip.

• Invest online: Buy individual stocks through an online broker. For this, you will need to open demat and trading accounts. Just fill out an application form and complete the Know Your Customer (KYC) formalities.

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.

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