Difference between stocks and shares

Author: Steven posted in Investing basics tagged with Investing 101

If you are new to the world of investing and are asking yourself exactly what are stocks and shares then this article should help you get started. Within the stock market world, the terms stocks and shares are used interchangeably and have the same meaning. For example, owning shares of Apple or owning Apple stock denote the same thing. Shares and stocks are also referred to as equity.

The role of stocks

A company issues shares in order to raise capital. Investors who purchase company shares are buying ownership in that company. Investors buy shares of a company to share the potential future profits of the company in the form of dividends. In addition to dividend payouts (not all company pay dividends because they use the profits to fuel their growth strategy), the shareholder can also profit from capital gain. Capital gain occurs when shares are sold for a price greater than what was originally paid for.

Capital gain example:

  1. Joe buys 100 shares of Company A at $5 per share (total investment = $500)
  2. Company A performs well and its profits grow
  3. Attracted by the performance of Company A, more and more investors buy shares of Company A. Such increase in demand causes the share price to appreciate to $7
  4. Joe sells his 100 shares at $7 per share, that’s $700
  5. Joe has made a profit of 40% on his initial investment ($200 profit)

In the above example we do not take into account any brokers’ fees or taxes that Joe may be liable for.

Types of shares

The are two main categories of shares, preferred shares and ordinary shares.

  • Preferred shares have fixed dividends and their payout has priority over the dividends paid to the ordinary shareholders. If the company were to face bankruptcy, preferred shareholders would have priority as well. The owner of preferred shares has no voting rights within the company
  • Common shares are the most common form of shares. Dividends can be adjusted based on the profits of the company and the shareholder also has full voting rights. Voting usually occurs at the company’s annual general meeting.

If you are investing in the stock market, you are most likely dealing with Common shares.

Quick summary

  • Shares, stocks, equity can be used interchangeably within the stock market world
  • Company issues shares to raise capital (although not covered in this article, consider that company can raise capital also through debt, for example by issuing bonds)
  • Investors buy stocks to share company profits through dividends
  • Investors can also profit through capital gains
  • The two main types of shares are preferred shares and common shares

 

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