Often in investing, we use the terms “stocks” and “shares” interchangeably. In most cases, that is perfectly fine, but we need to recognize that these two terms have different meanings. So, let’s go over what the nuances between stocks and shares are, including their key similarities and differences.
- From a financial standpoint, stocks vs. shares often refer to the same thing.
- The main difference is that stocks are used more broadly and generally to represent ownership in one or more publicly-traded companies. Meanwhile, shares are the smallest unit of stock and represent ownership in a specific investment.
- The four main types of stock are common stock, preferred stock, Class A stock, and Class B stock.
At a glance, stocks and shares may seem identical, but they have a couple of minor distinctions. Let’s quickly go over their definitions to clear up any confusion.
- Stocks, or equity, is a broad term used to describe partial ownership in one or more companies. For example, you would tell friends you own Apple, Inc. and Disney stock.
- Shares is a narrower term that has a much more specific meaning. It represents the denomination of a stock or ownership in a specific investment. For example, you would tell people you own ten shares of Apple stock.
If someone says they own 50 stocks, they could be referencing 50 different companies. But, if they say they own 50 shares, they are referencing a specific one. If a friend says they own 20 shares, you might respond by asking them, “Shares of what? What did you invest in?”
While shares generally refer to stock in a publicly-traded company, they can also apply to mutual funds, index funds, exchange-traded funds (ETFs), real estate investment trusts (REITs), etc. On the other hand, stocks refer specifically to corporate equities.
When a company wants to raise capital for expansion purposes, they generally have two options – issue stock or borrow money. If they issue stock, investors who buy them become shareholders, meaning they get partial ownership in the company. In exchange for their money, they get a claim on some of the company’s earnings and assets. Note that owning stock doesn’t mean you are entitled to any properties or assets owned by the companies.
Investors can profit in two main ways. More established companies, such as Apple, J.P. Morgan, and Costco, will pay dividends regularly to shareholders, such as monthly, quarterly, or annually. If companies perform well, their share prices go up, and investors can profit by selling the stocks for a higher price. On how long does it take to sell your stocks, click right here.
To buy and sell stocks, investors need to use a stock exchange. The two largest U.S. stock exchanges are the New York Stock Exchange (NYSE) and Nasdaq. The exchanges themselves do not own the stocks but are simply a place for buyers and sellers to exchange stocks.
In the context of equities, stocks refer to publicly traded companies. Investors often talk about specific types of stocks, such as energy stocks, tech stocks, large-cap or small-cap stocks, blue-chip stocks, value and growth stocks, etc. These various categories refer to the type of corporations that issued them rather than to the stocks themselves.
There are four main types of stocks:
- Common stock – When people talk about stock, they are probably referring to common stock. This type of stock is what most companies typically issue and what most people invest their money in. Common stock represents shares of ownership in a company, meaning stockholders can claim part of their profits and confer voting rights.
- Preferred stock – Preferred shareholders usually don’t get voting rights but, when a liquidation happens (aka bankruptcy), they have priority over investors with common stock (but after bonds). Additionally, if a company issues dividends, they are guaranteed to get paid. Think of preferred stock as a hybrid of stocks and bonds.
- Class A stock – Class A stock is a type of common stock. The primary difference between Class A and B stock is that Class A usually confers more voting rights. For example, Berkshire Hathaway Class A shares command a premium price and greater voting power at over $400,000 a share (as of September 2021).
- Class B stock – Class B stock is another type of common stock but confers fewer voting rights. Berkshire Hathaway Class B shares trade at a fraction of Class A’s price and have less voting power.
Each individual unit of stock is considered a share. In other words, one share of stock is equivalent to one unit of ownership in a company.
There are two main types of shares – common shares and preferred shares. As we mentioned earlier, these are two different classes of stock, often designated as “A,” “B,” etc., with varying rights and privileges. With the Berkshire Hathaway example, investors with Class A shares have more voting rights than investors with Class B shares.
In terms of what investors can own, there are private and public shares. Public shares are listed on a stock market, whereas private shares are not. With public shares, investors can easily buy and sell shares between each other. However, investors with private shares may have difficulty finding potential buyers and sellers.
When a private company’s leadership takes their company public, their shares change from private to public. This process usually gets done through an initial public offering (IPO), where the private company lists its shares on a stock market. For example, in September 2021, Toast, Inc. and Freshworks, Inc. IPOed on the NYSE. Another popular option nowadays is to go public through a special purpose acquisition company (SPAC), which is essentially a black check company created solely to raise capital.
The goal of owning shares is to make money either through capital gains or passive income. When investors sell shares for more than they bought them for, the difference is called capital gains. Usually, this happens when the companies successfully expand and grow or when there is positive market sentiment.
The other option is to invest in companies that distribute dividends regularly to shareholders. Currently, I have a dividend reinvestment plan (DRIP) enabled in my Roth IRA. So, whenever certain companies I’ve invested in, such as Apple, distribute dividends, they get automatically reinvested back into my account. In the future, I plan to open an account with a brokerage such as M1 Finance and create an investment pie of all dividend stocks to earn passive income.
The great thing about most brokerages these days is that they allow users to purchase fractional shares. That means you can buy a part, or a “fraction,” of a share of stock. For example, if you want to purchase Tesla stock, but you can’t afford it, you can buy a fraction of a Tesla share instead.
Things to Consider
When you buy stocks, you are not lending the companies money. That means you should not expect to get paid back or get interest from the company directly. Instead, you are buying partial ownership with the expectation that the company’s success will enable you to profit either through capital gains or dividend payments.
In addition to the two main classes of stocks we discussed, sometimes companies will create a two-tier class structure to allow leadership to stay in control of the company or prevent a takeover. Typically, a major trade-off of going public or issuing more stock is that the founders and executives lose partial control over the company. That is because they are selling a percentage of their ownership to public investors.
While the founders and board members can make recommendations to public shareholders on how to vote on specific issues, there is no guarantee that everything will go their way. That is unless they secure a majority of the voting rights among themselves.
One particular company that does this is Google. When Google first went public in 2004, co-founders Larry Page and Sergey Brin and their executive team, set up two classes of stock. Class A stock was issued to the public, while they received Class B stock, which had ten times more voting rights.
In 2014, Google did a 2-for-1 split of Class A stock and created Class C stock, which had no voting rights at all. Part of the reason why Class C stock got created resulted from concerns by the executive team that they would lose control of Google’s majority voting rights. After the split, Class A shares began trading under the GOOGL ticker, while Class C shares began trading under the GOOG ticker.
If we quickly calculate the stock outstanding for each class, we can see that Page and Brin maintain 51.5% of Google’s total voting rights. This percentage is no coincidence as it allows them to outvoted all Class A shareholders.
To buy and hold stock, you need to open a brokerage account. I currently have a stock investment account with Webull and a Roth IRA with Fidelity. Webull is great for investors and traders interested in using technical indicators, such as moving average crossovers and support and resistance and analyzing Level 2 data. But, for beginners, the UI may be overwhelming or difficult to understand.
What brokerage firm you decide to use will ultimately depend on your personal finance knowledge and preferences. If you are looking for something with a simple UI or want a more hands-off approach, consider a brokerage such as Fidelity, M1 Finance, or Charles Schwab.
The Financial Takeaway
While you won’t get docked off for using the terms stock and share interchangeably, they are not the same. Stock refers broadly to the ownership interest in publicly owned companies, whereas share is a denomination of stock. Now that you understand the difference, you can use the terms correctly!