Stocks and shares are often used interchangeably within the context of financial markets and stock exchanges in that they both refer to the ownership of financial equities within a company. The differences between shares and stocks are subtle, but they’re important to know if you’re buying or selling, investing or starting a limited company. In this blog, we’ll break down the similarities and differences between shares vs stocks.
What Exactly Are Shares and Stocks?
Simply put, “shares” are the more specific portion that makeup “stocks”. They are inextricably linked in that shares can be parts of the stock, but a stock cannot make up parts of a share. Think about it like a puzzle; the shares represent each individual piece of the puzzle, while stocks are the entire picture you see of the corporation once each piece, or ownership certificate, is put together.
When a company begins, or if at some point along the journey the owner wants to raise capital, it will issue stocks. Investors may choose to buy a company’s shares or stock, and rather than lending the company money, they are instead buying a percentage of the ownership of that company. Depending on the type of stock they purchase, they may have some say in how the company operates.
Stocks — the Broader Term
When a publicly-traded company issues stocks, it attracts investors by issuing certificates of ownership for that company. This allows stockholders to claim dividends, or payouts, that are representative of the company’s annual or quarterly earnings. An investor can own stocks for many different companies or multiple stocks from the same company, and there are different types of stocks with different advantages and disadvantages.
The first category and most popular type of stock is called “Common Stock”. When investors purchase common stock, they own a part of the corporation and have an active role in decision-making processes. They use each unit of their common stocks as one vote to elect a board of directors that help shape the company’s future. Common shareholders also receive a share of whatever remains in liquidation after creditors and preferred stockholders are paid in full.
“Preferred stock” refers to a type of stock that receives a higher payout than common stock and preference over liquidation assets. Preferred stockholders always get priority on assets before common stockholders if a company goes bankrupt. The dividends are typically higher than common stock and are paid out monthly or quarterly. However, preferred stockholders’ voting and governance rights within the company are either limited or non-existent.
Shares — Getting More Specific
Shares represent individual units of stock and can be measured in numerical value. For example, you would say, “Jane owns three shares of Apple”, or, “Jane owns stock in Apple, Google and Vodafone”. If you have three shares of Apple and decide to broaden your investments by purchasing shares of another company, the terminology changes to stocks because it involves the shares of more than one corporation. Shareholders can be removed from the company or willingly sell their shares.
Why Do I Need to Know the Difference between Shares vs Stocks?
If you’re starting a business, it’s important to take note of the incredibly valuable source of capital acquisition that shares and stocks provide. Only public limited companies can issue shares and stocks, and many investors will be unwilling to invest their money into your business without the option to receive shares in return.
Knowing the difference empowers you to make better business and investment decisions for you and your business. Registering your UK company as a public limited company allows you to issue shares and stocks and puts you at an advantage over your competitors.
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