When it comes to shares versus stocks, pinning down the difference can be tricky, particularly for beginner investors. There's confusion about shares versus stocks because investors and financial news media use the terms interchangeably.
Not being able to tell the difference between shares and stocks won't stop investors from participating in the stock market or diminish investment returns. However, knowing the difference may help improve your understanding of the investing world.
What are shares and stocks?
Shares and stocks usually refer to the same thing. They’re used when talking about ownership in a company. However, they have distinct meanings. Often, the context helps bring out the difference between shares and stocks.
A stock is a type of security that represents a stake in a public company. The term can be used to refer to a publicly-traded company. As a result, you might hear investors and financial professionals talk about tech stocks and mean public tech companies. Some investors and financial professionals refer to health stocks and mean public companies in the healthcare sector.
A share is a slice of a stock. It’s the smallest unit of measurement of ownership in a company. When you invest in a stock, you receive a share or shares in the company that issued the stock. However, the term share can be used in reference to other securities like mutual funds and ETFs — not just stocks.
The term stock identifies the investment, while a share shows the size of the investment. If someone says they own Netflix stock, it means that they have put their money in Netflix in exchange for a claim on the company’s earnings and assets.
If someone says they own 100 Netflix shares, it shows the size of their economic interest in the company. While two investors may own Netflix stock, the weight of their investment in the company may be different. The weight of their investment is measured by the number of shares held.
How do share and stock valuations differ?
By their nature, stocks are fully paid up. However, shares can be fully paid up or partially paid up. While a share has a nominal value, a stock doesn’t have a nominal value. Also, while shares have a definite distinctive number, a stock doesn’t.
Other main differences between shares and stocks
While stocks show the type of asset invested in, shares refer to the ownership units of a specific company. The other difference that comes out in the shares versus stocks comparison is that stocks fall under two broad categories. Stocks are common or preferred based on the rights and privileges they carry.
Investors holding common stocks have voting rights at the shareholder meetings of the company that issued the stock. Therefore, they have a say in how the company runs like deciding who sits on the board and how it approaches certain major issues.
However, investors holding preferred stock don't have voting rights. Instead, they will be paid first if a company is liquidated. Also, preferred shareholders are given priority when it comes to the dividend payment.
Some companies offer common stocks without voting rights. However, the controversial structure has unsettled some large investors. In response, the S&P 500 Index decided to ban companies that offer common stocks without voting rights.
Do investors prefer shares or stocks?
Since shares denote a stake in a particular company, some investors may prefer shares of a specific company. For example, an investor starting with a small budget may choose to put their money in the shares of a particular company because it pays the best dividends. Investors want to maximize their income. Companies calculate and payout dividends per share. The amount may range from a few cents to several dollars.
Since a stock refers to a public company, some investors may prefer building a portfolio of diverse stocks. Building a diversified stock portfolio can help investors spread out the risk. An investor who owns tech stocks, energy stocks, healthcare stocks, and airline stocks can still perform well overall even if a few of the sectors disappoint. For example, airline and cruise ship stocks, part of the so-called epicenter stocks, crashed as when the COVID-19 pandemic disrupted global travel.