Shares vs. stocks: Understanding the difference

Most of us in a casual conversation often refer to stocks as shares and vice versa. But do you know stocks and shares are two different entities? Though these two terms are often used interchangeably, they have different meanings in the world of finance.

If you also get confused between ‘shares’ and ‘stocks’ then you are reading the right article. Here, we will explain these terms in simple language, making it easy for you to understand their differences and significance.

• Table of contents

1. Understanding stocks
2. Understand shares
3. Shares vs stocks
4. Various types of stocks
5. Various types of shares
6. Benefits and risks of investing in stocks and shares
7. Ways to make money from stocks

Understanding stocks

A stock is an ownership in a company, meaning you own a small part of that business when you buy it. Public companies sell stocks to raise money for growth, operations, and expansion. As a shareholder, you have a stake in the company’s success. Stocks are bought and sold on exchanges like the Bombay Stock Exchange (BSE) and the National Stock Exchange of India (NSE).

Companies issue stocks to attract investment and fund their business needs. Owning stocks allows investors to benefit from the company’s profits, but it also comes with risks if the business performs poorly. Stocks are a common way for people to invest and grow their wealth over time.

Understand shares

A share is the smallest unit of a company's stock, representing a portion of its ownership. If a company has 1 lakh shares, owning 100 shares means holding 0.1% of the company. Anyone owning 10% or more is called a principal stockholder.

Shareholders may earn dividends or interest, but many invest hoping the company’s value increases, raising share prices. They can then sell shares at a higher price to make a profit. The goal is to invest in a growing business, benefiting from both potential earnings and rising stock value. This is how shareholders make money from their investments.

Shares vs stocks

• Definition: Stocks represent overall ownership in a company, while shares are units of that ownership.
• Context of usage: The term stock is used to refer to ownership in multiple companies, while shares refer to a specific portion of a company's stock.
• Divisibility: Shares are countable units, whereas stock is a broader term used to describe a company’s ownership structure.
• Types: Stocks can be classified into common and preferred stocks, whereas shares can be ordinary or preference shares.

Various types of stocks

Common stock

• Holders can vote in shareholder meetings.
• They receive company dividends regularly.
• They have a more direct investment in the business.

Preferred stock

• No voting rights for holders.
• They receive dividends before common stockholders.
• In case of bankruptcy, they are paid before common stockholders.

Blue chip stocks

• Shares of large, well-known companies with strong growth history.
• They usually pay dividends.
• Preferred by investors due to company reliability.

Stocks by market size

• Large cap, mid cap and small cap stocks: They are categorised by company size.
• Microcap stocks: Shares of very small companies.
• Penny stocks: Low-priced shares with higher risk.

Read Also: Mutual Funds vs Stocks: Differences and Which is Better?

Various types of shares

Equity shares:

These are the most common type of shares issued by companies. Equity shareholders have voting rights and can influence company decisions. They are actively traded in the stock market. Equity shares can be further categorised based on share capital, definition and returns. However, they carry higher risk as dividends are not guaranteed.

Preference shares

These shares come with a priority advantage. In case of company liquidation, preference shareholders are paid before equity shareholders. They also receive fixed dividends but usually lack voting rights.

Benefits and risks of investing in stocks and shares

Benefits

High returns over time

Stocks have historically given better returns compared to other investments like bonds or savings accounts. If you stay invested for the long term, your money has the potential to grow significantly.

Earn extra money with dividends

Some companies share their profits with investors by paying dividends. This means you can earn money regularly, which may be crucial for investor seeking income from their investments.

Easy to buy and sell

Stocks are highly liquid, which means you can quickly buy or sell them whenever needed. This gives you the flexibility to change your investment plan whenever required.

Own a part of the company

When you buy stocks, you become a part-owner of the company. In some cases, you even get voting rights to help decide on important company matters.

Reduce risk with diversification

The stock market lets you invest in different companies and industries. By spreading your investments, you mitigate the risk of potential losses if one sector performs poorly.

Risks

Market ups and downs

Stock prices can change quickly due to the economy, political events or company news. If the market goes down, your investments may lose value in the short term.

Company-specific issues

When you invest in a single company, your returns depend on how well that company performs. Bad management decisions, poor earnings or internal problems can cause stock prices to drop.

Economic factors

Big-picture issues like inflation, high interest rates or a slowing economy can affect the entire stock market. This can lead to falling stock prices and lower company profits.

Difficulty selling stocks

Some stocks, especially those from smaller companies, may not be easy to sell when you want. You might have to wait longer or accept a lower price than expected.

Emotional decisions

Investors sometimes make impulsive choices based on fear or greed. Selling in panic when the market drops or chasing trends can lead to losses. Staying patient and making informed decisions is key.

Ways to make money from stocks

• Capital gains: Buying stocks at a lower price and selling them at a higher price.
• Dividends: Some companies pay shareholders a portion of profits.
• Stock buybacks: Companies may buy back their own shares, increasing the value of remaining shares.

Read Also: Shares vs Mutual Funds: Key Differences for Smart Investing

Conclusion

Understanding the difference between shares and stocks is essential for investors. While both represent ownership in a company, shares are units of stock. Whether you're investing for long-term gains, dividend income or capital appreciation, knowing how stocks and shares work will help you make better financial decisions.

FAQs:

Are shares and stocks the same?

No, stocks represent ownership in a company, while shares are individual units of that ownership.

Which is better, share market or stock market?

Both terms are often used interchangeably, but "stock market" refers to the overall market where stocks are traded, while "share market" specifically refers to the buying and selling of shares of a company.

Does 1 stock equal 100 shares?

Not necessarily. It depends on how a company chooses to issue its shares.

What is 100 shares of stock called?

A lot of 100 shares is often referred to as a "round lot."

How many shares is a stock?

The number of shares a stock represents depends on the company's total issued shares. A stock can be divided into any number of shares by the company.

Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.