Shares vs. Stocks: An Overview
The distinction between stocks and shares is pretty blurred in the financial markets. Generally, in American English, both words are used interchangeably to refer to financial equities – specifically, securities that denote ownership in a public company (in the good old days of paper transactions these were called stock certificates). Nowadays, the difference between the two words has more to do with syntax and is derived from the context in which they are used.
Of the two, "stocks" is the more general, generic term. It is often used to describe a slice of ownership of one or more companies. In contrast, in common parlance, "shares" has a more specific meaning: It often refers to the ownership of a particular company.
So if someone says she "owns shares," some people's inclination would be to respond, "shares in what company?" Similarly, an investor might tell his broker to buy him 100 shares of XYZ Inc. If he said "buy 100 stocks," he'd be referring to a whole alphabet of companies – 100 different ones, in fact.
That comment "I own shares" might also spark a listener to respond even more generally, "shares of what? what sort of investment?" It's worth noting that one can own shares of several kinds of financial instruments: mutual funds, exchange-traded funds, limited partnerships, real estate investment trusts. Stocks, on the other hand, exclusively refer to corporate equities – securities traded on a stock exchange.
Let's confine ourselves to equities and the equity markets. Investment professionals often use the word "stocks" as synonymous with "companies" – publicly-traded companies, of course. They might refer to energy stocks, value stocks, large- or small-cap stocks, food-sector stocks, blue-chip stocks. In each case, these categories don't refer so much to the stocks themselves as to the corporations that issued them.
Technically speaking, shares represent units of stock. A share is the single smallest denomination of a company's stock. So if you're divvying up stock and referring to specific characteristics, the proper word to use is shares.
Common and preferred refer to different classes of stock. They carry different rights and privileges, and trade at different prices. Common shareholders are allowed to vote on company referenda and personnel, for example. Preferred shareholders do not possess voting rights, but on the other hand, they have priority in getting repaid if the company goes bankrupt. Both types of shares pay dividends, but those in the preferred class are guaranteed.
Common and preferred are the two main forms of stock shares; however, it's also possible for companies to customize different classes of stock to fit the needs of their investors. The different classes of shares, often designated simply as "A," "B," and so on, are given different voting rights. For example, one class of shares would be held by a select group who are given perhaps five votes per share while a second class would be issued to the majority of investors who are given just one vote per share.
The interchangeability of the terms "stocks" and "shares" applies mainly to American English. The two words still carry considerable distinctions in other languages. In India, for example, as per that country's Companies Act of 2013, a share is the smallest unit into which the company’s capital is divided, representing the ownership of the shareholders in the company, and can be only partially paid up. A stock, on the other hand, is a collection of shares of a member – converted into a single fund – that is fully paid up.
- For all intents and purposes, stocks and shares refer to the same thing.
- The minor distinction between stocks and shares is usually overlooked, and it has more to do with syntax than financial or legal accuracy.
- To invest in stocks – or more specifically, to invest in shares of a company's stock – you will need your own brokerage account.