Difference between shares and stocks
This section will focus on the differences between stocks and shares:
Feature
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Shares
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Stocks
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Definition
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Shares, on the other hand, are individual units of stock. Each share signifies a specific portion of ownership in a single company.
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Stocks represent part ownership in a company or multiple companies. They are financial instruments indicating an investor's stake in one or more organisations.
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Denomination
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Two different shares may not have the same value. Two stocks can have different values.
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Generally, stocks of a company are considered equivalent in value.
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Nominal value
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Shares are associated with a nominal value.
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Stocks do not have a nominal value associated with them.
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Possibility of original issue
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Shares do not involve the possibility of an original issue.
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There is always a possibility of an original issue for stocks.
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Paid up value
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Shares may be partially or fully paid.
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Stocks are typically fully paid up.
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Scope
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Shares have a narrower scope, representing ownership in a specific company.
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Stocks have a broader scope, representing ownership in a sector or the entire market.
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Additional read: What is share market
Types of stocks
Listed below are different types of stocks:
1. Large-cap stocks
Stocks of reputed and established companies with substantial amounts of cash at their disposal, are referred to as large-cap stocks.
2. Mid-cap stocks
Stocks of medium-sized companies are called mid-cap stocks.
3. Small-cap stocks
These stocks belong to small companies with low market capitalisation.
4. Common stock
Represents an ownership stake in a company, affording shareholders the right to vote on key decisions and potentially receive dividends. However, common stockholders stand last in line for company assets in the event of liquidation.
5. Preferred stock
Exhibits characteristics of both equity and debt.Although it typically lacks voting rights, preferred stockholders hold a higher claim on a company's assets and earnings compared to common stockholders. Dividends for preferred stock are usually fixed.
6. Growth stocks
Belong to companies poised for above-average growth in revenue, earnings, and cash flow. These stocks often prioritize reinvesting earnings into the business rather than distributing dividends to investors.
7. Blue-chip stocks
Denotes shares of large, well-established companies known for financial stability and reliability. Blue-chip stocks are often considered safer investments, having demonstrated a history of consistent performance.
Type of shares
One can categorise shares into two types:
1. Equity shares
Companies issue equity shares to raise capital. These shares can be further categorised into authorised share capital, issued share capital, and others.
2. Preference shares
Preference shares enable the owners to receive preference over equity shareholders at the time of capital reimbursement and dividend distribution.
Benefits and risks
Here are the benefits of investing in stocks and shares:
- Investing in stocks ensures portfolio diversification
- Stock investments are a good source of dividend income which helps to grow a substantial corpus
- One can liquidate stocks with ease
- Stocks hold the potential to generate high returns over a short time
The primary risks of investing in stocks are as follows:
- Market risk- Stock prices depend on supply and demand in the market. It is subject to daily fluctuations
- Company risk- Stock prices can fall if the company undergoes financial problems
- Liquidity risk– A company facing liquidity/ solvency problems may find it difficult to repay debts and may not generate dividends
Common misconceptions about stocks and shares
The terms "stocks" and "shares" are often used interchangeably, but there are some key distinctions and misconceptions to clear up for new investors. Here's a breakdown of some common misunderstandings:
- Stocks and shares are different things: While they are closely related, there's a subtle difference between shares and stocks. A share represents a unit of ownership in a company. When a company divides its ownership into tradable units, each unit is called a share. A stock, on the other hand, refers to a collection of shares issued by a single company on a stock exchange. So, you can think of a stock as a type of share, but not all shares are necessarily stocks.
- You need a lot of money to invest: This isn't entirely true. Many online brokerage platforms allow investors to start with small amounts and invest fractional shares of companies. This makes the stock market more accessible than ever before.
- Investing is guaranteed to make you rich: This is a dangerous misconception. Stock prices can go up and down, and there's always the possibility of losing money. Investing should be viewed as a long-term strategy for wealth creation.
- Only publicly traded companies have stocks: Not all companies offer stocks. Private companies are not listed on stock exchanges and their ownership is not divided into tradable shares. Only publicly traded companies have stocks available for purchase by the general public.
Understanding these common misconceptions can empower you to approach stock market investing with a more informed and realistic perspective.
Additional read: Difference between stocks and ETFs
How do people make money with stocks?
There are two ways by which people make money through stocks:
- People can engage in a ‘buy and hold’ strategy where they remain invested for a longer timeframe and sell them at a high price to make capital gains
- The other way to earn money from stocks is to receive dividends paid by the company to shareholders
The strategic step is to formulate the right investment strategies, resulting in success with stock investments. One must evaluate their risk profile and decide on the investment horizon.
Investors must conduct thorough research before purchasing stocks. Often, people make the mistake of opting for an investment resulting in losses they cannot afford. Financial experts keep emphasizing that investors must invest their surplus funds only. It is a bad idea to borrow money for investment purposes.
Even though the two financial terms are often used interchangeably, there are differences between stocks vs shares. The differences may be too small for most people, but one must understand the concepts before investing in them.
