People often interchange the terms stocks and shares in conversation, and perception. But there is a difference between the two terms. In fact, there are a lot of differences.
Difference Between Stocks vs. Shares
The reason people think the terms are interchangeable is because when either term is used, people think of a piece of paper – the old-fashioned stock certificate, which indicates ownership in a company.
What Are Stocks?
When a company wants to raise capital – funds for operations or expansion – it can issue stocks that give investors ownership in the company, or it can borrow money from investors.
Stocks are a type of “security” that represent part-ownership in a company. A stock certificate used to be awarded as proof of ownership in a company, or multiple companies, representing the number of stocks an investor owned in a company.
Some stocks pay monthly, or quarterly or annual dividends – a benefit from earnings based on how many stocks are held by an investor. Investors can hold stocks in a variety of companies.
What Are Shares?
A “share” indicates a portion of ownership in a particular company. Stocks are divided into shares: a share is the smallest denomination of a company’s stock.
To confuse people more, each unit of stock is a share in a company. So each share of stock is equal to a piece of one particular company’s ownership.
For example, a principal stockholder is defined by the Securities and Exchange Commission as an individual or entity holding 10% or more of the company’s stock. So, regardless of the number of stocks (proven by certificates) or shares someone holds in a company, if they hold 10% or more of the total, they are considered a principal stockholder.
When someone says they own “shares” in a company, they mean they own stock that amounts to a certain percentage of the company’s total stocks.
When someone says they own “stocks,” they could be talking about a portion of stock from one particular company, or several companies.
A person could hold 17,000 shares of Motorola (MSI) - Get Motorola Solutions, Inc. Report, or less than 1% of the 176 million shares the company had outstanding as of Sept. 30, 2019. Those 17,000 stocks would actually be less than 1% share in the company, but it would still be 17,000 securities issued by the company to investors as proof of ownership.
Stocks vs. Shares: Key Differences
When you buy one or several stocks in a company, you aren’t lending the company money in expectation of it being paid back, with interest; you’re buying a piece of ownership in the company, with your interest in the company’s success leading you to expect your investment to make some money.
As a part owner of the company, you are entitled to a share of its earnings and assets. When the company does well, you can make additional money by selling your stock at a higher price than that at which you bought it.
While some people use the terms stocks and shares interchangeably, the term shares could refer to other kinds of investments, such as a mutual fund. In a mutual fund, you own shares, but not actual whole stocks. You own a portion or shares of the stock held in total by the mutual fund.
It could also refer to holding shares in limited partnerships, exchange-traded funds, or even real estate investment trusts. Stocks, meanwhile, refer specifically to corporate equities, a type of security traded on a stock exchange.
For instance, common shareholders are allowed to vote on company questions and personnel, such as for the board of directors and a direction or action the company’s board wants to take. Preferred shareholders don’t have voting rights, but have priority in getting repaid if the company goes bankrupt. Also, while both classes of shares usually pay dividends, those in the preferred category are guaranteed to be paid.
In addition to the two typical classes of stock shares, some companies also customize different classes of stock to fit investors’ needs. Often, the different classes of stock shares are designated alphabetically, as in “A” and “B,” for as many classes as the company wants to distinguish, and given different voting rights.
For example, a founding family of a corporation may have one class of shares, given five votes per share, while another class might be issued to the majority of investors, and given just one vote per share, or as preferred shares - with no voting rights at all.
Often, owners of privately-owned companies that go public – like a family business – create the two-tier class structure to maintain control or make it harder for someone to target the company for a takeover.
In addition to common and preferred shares, or Class A and B shares, there also exists a type of share known as advisory or advisor shares. These shares are given to business advisers for their insight or expertise. Frequently, the advisers receiving such shares are company founders or other such high-level executive officers of the company. Advisor shares are usually rewarded as a stock option, and in lieu of cash compensation – meaning they can’t be converted into stocks for a set period.
7 Key Differences Between Stocks and Shares
1. Ownership: someone who owns stocks may hold ownership in one or more companies; someone who owns shares in a company has ownership of just one particular company.
2. Denomination: someone who owns stocks may own two different stocks of different values; someone who owns shares in a particular company may own multiple shares of the same or equal value.
3. Original issue: Stocks can be issued at any time by a company or companies needing to raise capital; shares cannot.
4. Nominal value: Shares tend to have a nominal value associated with them, such as $5 a share, while stocks have no nominal value.
5. Numeric value: Shares have a definite number known as a distinctive number; a stock doesn’t have any such number.
6. Paid up value: Stocks are always fully paid up by their nature; shares can be either fully paid up or partially paid up.
7. How much is either preferred: In terms of transfer, stocks’ preference is lower because they can’t be in fractions; shares have a higher preference because they can be in fractions in a transfer.