When we talk about investment in the share market or investment in stocks, there are a majority of investors who think it is the same thing. The words shares and stocks are often interchanged and used in the same context. For an average investor, these words mean the same thing but it is important to note that there is a subtle difference between them. In order to have a better understanding and investment in shares, it is important to know the correct difference between the two.
Given below is the exact meaning of the two terms and a few pointers that indicate the basic difference between them.
A share of a company is the smallest denomination of the stock of any company. This means that shares are a portion of the company’s stock that represents the ownership of the shareholder in that company.
To understand this concept further, let us take an example where Mr. X holds 10% stock of Company A. The company has issued 1000 shares that make up its entire stock. Therefore, this would imply that Mr. X holds 100 shares of Company A.
The provisions of the Companies Act, 2013 provide that a company can convert it’s fully paid-up shares into stock. The ownership of the promoters of the company or other key shareholders can then be represented as a percentage of the stock as highlighted in the above example.
What is stock?
Now coming to stocks, the literal meaning of this term is a bunch or aggregate of something. To put this in the context of a company’s holdings, stocks are the compilation or the accumulation of the shares of a company. Stocks represent the part ownership of one or more companies held by a person whether an individual or not. While the number of shares issued by a company is finite, there is no limit to the amount of stock held by a person in their portfolio. As mentioned above, it can belong to one or more companies and form part of the person’s portfolio.
Let us take the above example again to understand the concept of stocks better.
Mr. X holds 100 shares of Company A. the total number of shares issued by the company is 1000 shares. This means that Mr. X. holds 10% stock of the company. Furthermore, if Mr. X also holds 200 shares of Company B where the total number of shares is 4000, he holds 5% stock of Company B. Therefore, ultimately in the portfolio of Mr. X, he has 10% stock of Company A and 5% stock of Company B.
After understanding the basic meaning of the two terms shares and stocks, let us not consider the basic differences between the two.
|Shares represent the ownership of the person in a particular company.
|Stocks represent the ownership or the share of the person in one or more companies.
|Stocks do not form part of the original issue by any company. After the issue of shares, they are converted to stocks.
|Shares form part of the original issue by any company.
|Stocks do not have a nominal value attached to them
|Shares have a nominal value that is allotted to every share of the company.
|Stocks are a bundle of shares. Hence, it is possible to transfer them in fractions. or smaller portions.
|Shares of a company can be transferred in lots but not in fractions.
|There is no limit to the maximum stock that can be held by a person in their portfolio. Stocks can be from one or multiple companies hence, for investors, the sky’s the limit when it comes to accumulating stocks.
|When a company issues shares, they are in a definite quantity. Hence, there is a ceiling on the maximum number of shares of a company that can be held by any person whether (individual or not).
|Shares can be converted to stocks only when they are fully paid. Hence, stocks are always fully paid up
|Shares, on the other hand, can be fully paid up or partly paid.
|Stocks are usually of two broad categories – Common stock and preferred stock. These stocks can be further classified as a growth stock, value stock, income stock, blue-chip stocks
|Shares can be of a private company or a public limited company. These shares are broadly categorized as common shares or equity shares and preference shares. Such shares can further be fully paid or partly paid shares.
|Stocks held by an investor can be of different companies and hence can have different denominations
|Shares of a company have the same denomination irrespective of the times they are issued. The only change in the denomination of the shares is in the case of splitting of shares.
What is the impact on dividend and voting rights?
Owning a share of a company also provides voting rights and the right to receive dividends. The more the number of shares that a shareholder has, the more voting rights and dividend rights they get. When these stocks are converted to stocks, the voting rights are not altered in most cases. However, in cases where a private limited company is converted to a listed company or when a company promoted by the founding family may issue different classes of shares for the general public and promoters where each of the promoters shares may have higher voting right than ordinary shares.
The terms shares and stocks have distinct meanings. However, they are often used in place of the other. While it usually does not create any major confusion or serious errors (especially for small investors) in understanding an investment, it is anyway important to understand the basic differences between them to have a better grip on the markets and their nuances.
The most common ways of earning money from the stock markets are by selling the shares at a profit (capital gains) or through dividends declared by the company on the shares.
The key to having a profitable portfolio is by investing in fundamentally strong stocks and having a diversified portfolio. Investors should also aim at a long-term investment horizon to reap maximum benefits.
Blue-chip stocks are the stocks of companies that are usually the market or segment leaders and have consistently performed well over decades.
Preference shares are a class of shares issued by the company that has a preferential right of dividend as well as at the time of liquidation of the company. These shares, however, do not have any voting rights.