The distinction between shares and stocks has become somewhat blurred in today’s financial market. These two words have been used interchangeably as a reference to a piece of paper which denotes ownership in a select company. These are called stock certificates. The difference between these two words is dependent on the context in which they are used. A share is a unit of ownership.
For instance, a ‘share’ refers to ownership certificates from a select company. ‘Stock’ on the other hand is used to describe those ownership certificates. If you hear an investor mention they own stocks, then chances are they are talking about their overall ownership in one or many companies.
Stocks and shares is basically the same thing. The difference is minor and accurate through language syntax. If you want to get technical, the person with a portfolio of shares own stocks. Stock is a catchall term.
If you see ‘equity- trades’, it is the exact same thing as share trading. The person who buys interest in the company is referred to as shareholders, and they now have claim on part of the company’s assets and earnings. Companies divide their capital into equal units to sell on the stock market as a way to create more capital rather than borrowing from the banks.
If a company has made it successfully through its start-up phase, as a result they can turn to financial markets for more financing. The way this is done is by splitting the company into ‘shares’. These shares are now on the open market through a process called ‘initial public offering’, or also known as IPO. People, who buy these shares or stocks, are in actuality buying a part of the company and now are known as part owners. For this reason, stock is also known as ‘equity’.
There are two main types of shares, preferred stock and common stock. Every corporation has a common stock. Some corporations even issue preferred stock.
Here is an example of how shares work:
Say you buy 10 shares at $10 each from a company. You now have invested $100 into that company. If the value of the company increases by 10%, your shares will increase by 10%, creating a value of $110. If the company value decreases, the value of your shares will also reflect the decrease.
If you have ever heard the term “buy low, sell high” this refers to investment trading. Shareholders earn a profit by reselling their stocks or shares at a higher price than what they paid for them. Another way to profit is to hold onto the shares and receive a dividend payment as the company prospers. This is considered a long-term investing strategy.
If you are a shareholder of a company you may be able to influence the decisions of a company through voting. Preferred stock holders do not usually get to vote, but do have a higher claim on assets and earnings above holders of common stock, like receiving dividends. They also have a higher priority in the event of bankruptcy. Common stockholders are entitled to vote at shareholders’ meetings as well as to receive the dividend payouts.
Equity is another term used to describe ownership in a company. Equity can mean stock or shares, and stock options. Stock options permit the right to buy a certain number of shares at a certain price over a certain amount of time. However, they do not represent ownership unless you have a vested right to buy them, but until then there is no equity. Stock is considered an equity investment, as you are expecting to derive income either from dividends or the profit you will make selling the stock (also referred to as capital gains).
Investors will diversify their portfolios between stocks and bonds to balance risk. There is always a risk factor associated with investing into a company should the company go belly up or merge. If the company doesn’t do well and increase its value over time this can be a loss. At the same time, if the company performs well, much of the profits go to those who own the stocks. The overall stock market carries risk in the wide spectrum of volatility. The investor could profit or lose money in a relatively short time. This is called a short-term risk. Risk is minimized with long-term risks, waiting for an established company’s value to rise.
Transferring shares of stocks is a taxable event. Many companies will offer stock options to employees of the company. The company will reserve shares of its stock until the options are exercised. These employee stock options are typically governed by a ‘vesting’ schedule. This is basically offering an employee the benefit upon employment, but requiring the employee remain with the company for a certain period of time.