The difference between stocks and shares

The terms stocks and shares are often used together as a phrase, and many people mistakenly believe they are one and the same thing. However, they are not. There is a subtle difference between stocks and shares. The stock you own in a company can mean various things, while the word “shareholder” means you own shares of company stock.

What are stocks?

Stock, also known as equity, refers to ownership in a company (publicly traded company) that issues shares. It can also refer to the company that issues the stock e.g. Apple (AAPL) stock. A stock tells you the company or asset you are investing in.

Types of stocks

There are two types of stocks. They include common stock and preferred stock.

Common Stocks

For Common stocks, the shareholders have voting rights and have the right to receive dividends. However, dividends are not guaranteed, and the dividend amount can vary yearly when issued.

Preferred Stock

Preferred stock Pays guaranteed dividend payments to its holders. Therefore, shareholders get the opportunity of two sources of income from this type of stock – appreciating prices on the stock and guaranteed dividend income.

Every public company has common stock, but few companies issue what is known as preferred stock. If you are considering buying stocks and shares, it’s important to know the difference between common and preferred stocks.

There are several advantages to owning preferred stocks over common stock. If a company issues common stock, as well as preferred stock, and the common stock also pays dividends, the preferred stock dividend is usually higher. Another advantage is that preferred shareholders have priority over common shareholders. If the company goes into liquidation, preferred shareholders are more likely to get some form of compensation than common stockholders.

Preferred stock does have a downside; it does not come with voting rights.

What are shares?

A share is the measurement of the units of stock of a specific company that you, an investor, own. A share ensures that you own a piece of the company – a unit of ownership, e.g. you own 20 shares of Unilever (ULVR).

Types of shares

There are four types of shares. They include.

• Ordinary shares: Same as common stocks
• Preferred shares: Same as preferred stocks
• Deferred shares: They are typically issued to company founders and executives, and they hold the lowest priority in bankruptcy proceedings, following preferred and common stocks
• Non-voting shares: The shareholders do not have voting rights but may have different dividend rights and liquidation entitlements compared to voting shares.

The benefits of owning shares

Owning stocks and shares gives you certain benefits, including:

• The potential for capital appreciation.
• Dividend Income
• Shares represent ownership and voting rights
• The potential for portfolio diversification.
• Liquidity – stocks can be relatively easily bought or sold on the open market.
• Accessibility – available to individual investors through stock exchanges and brokerage accounts.

Private and Public Shares

There are two main distinctions of shares – Private and Public.

Private shares, also known as privately held shares or closely held shares, are ownership interests in a company that are not publicly traded on a stock exchange.

Public shares, also known as publicly traded or common stock, are ownership interests in a company that are freely tradable on a public stock exchange. Public shares are available to the general public and can be bought and sold by individual and institutional investors.

Investing in stocks and shares is an interesting proposition. Still, if you plan on owning stocks and shares, it is quite a complex marketplace for the ordinary person, and it comes with its own special jargon. If you’re contemplating becoming an investor, it’s advisable to understand the basics, such as the stock and share difference.

Stocks and shares comparison

How many shares make a stock?

There is no set number of shares that make a stock. If you want to buy Tesla stocks and you have £1,500 to invest. If Tesla stock is trading at $157 per share, you will be able to buy 9.55 shares with a £1,500 investment.

The specific number of shares that are issued by a company depends on various factors, such as regulatory requirements, the company’s financial performance, and the decisions made by the company’s management and charter.

The difference between equity and shares

If you are new to the concept of stocks and shares, you might think equity and shares are the same. They are not. Here are the differences between equity and shares:

• Shares refer to the units of ownership into which the capital of a company is divided. When a company is incorporated, its ownership is divided into shares, and these shares are typically represented by physical or electronic certificates. Shareholders hold these shares, which represent their ownership stake in the company.
• Equity, on the other hand, is the residual interest in the assets of a company after deducting its liabilities. It represents the ownership interest in the company’s assets and is often referred to as shareholders’ or stockholders’ equity. Equity is calculated by subtracting the total liabilities of a company from its total assets.

If you now have a handle on the difference between stock and equity, let’s explore the meaning of stock.

The difference between A and B shares

You can also own stock in a company via Class A and B shares. If you are contemplating buying stock, it’s important to know the difference between class A and class B shares.

Class A shares have more powerful voting rights than Class B shares. The price of Class A shares is usually higher and may offer better dividend payments than Class B shares. Also, the potential for capital appreciation may be higher for class A shares. Purchasing Class A shares means you own units of common stock, but they are broken down into different types – voting and non-voting Class A shares, traditional Class A shares, technology Class A shares, and high-priced Class A shares.

Class B shares have none or fewer voting rights and may be offered at a lower price than Class A shares, making it a more attractive investment option. The Potential for capital appreciation and dividend payments may be lower for Class B shares. Purchasing Class B shares means you own units of common stock, but they are broken down into different types – voting and non-voting Class B shares, discount Class B shares, founders’ Class B shares, and dual-class shares.

If you are considering investing in Class A or Class B shares, ensure you conduct your research and understand the risks involved. You should also speak to a financial advisor to get personalized advice.

Types of stock investing style

Growth Stocks

Growth stocks are stocks of companies that are expected to grow at an above-average rate compared to other companies. These stocks often reinvest their earnings into expansion and innovation rather than pay dividends. Growth stocks typically have higher volatility but offer the potential for significant capital gains.

Value Stocks

Value stocks are stocks of companies that are considered undervalued compared to their intrinsic worth. They may have lower price-to-earnings ratios or other fundamental indicators that suggest they’re priced below their true value. Value stocks are often sought by investors looking for bargains or long-term investment opportunities.

Emerging Market Stocks

Emerging market stocks refer to stocks of companies based in developing countries with rapidly growing economies. These stocks offer the potential for higher returns but also come with increased risks due to factors like political instability, currency fluctuations, and regulatory changes.

How to start buying stocks

Buying stocks is a specialised skill. If you proceed blindly without knowing what you are doing and you don’t understand how stock markets and the world economy work, you can lose money all too easily.

You need to know the difference between ordinary shares and preference shares, the difference between bonds and shares for long-term investments, and things like what mutual funds exchange traded funds are.

If you think you have sufficient knowledge of all of these things (and more), your next decision is, do you want to buy stock? You must always bear in mind that any type of investment, including all types of shares, carries a degree of risk.

One way on how to invest money in stock is to buy shares that are traded on a stock exchange through a stockbroker. We are talking about stock exchanges like the FTSE 100 and FTSE 250. The difference between the FTSE 100 and FTSE 250 is only in the numbers. The FTSE 100 lists the top 100 companies listed on the London Stock Exchange by market cap. The FTSE 250 lists the top 250.

If you invest in shares in this way, there could be more risk unless you really know the ins and outs of the stock markets and how to trade stocks. Alternatively, you could develop an investment strategy using stocks and shares or cash ISA vehicles. In fact, if your investor profile is such that you want to take advantage of both your short vs long financial needs, these could be your best options.

Before committing to long-term investing, such as for your retirement, it’s important to set money aside in an emergency fund. While a stocks and shares ISA is great for your long-term investments, an easy-access Cash ISA is ideal for your short-term emergency fund.

You can open either type of ISA online via a personal wealth management specialist like Moneyfarm.

Stocks and Shares ISAs can contain a variety of assets, including:

• Cash, including cash held in foreign currencies
• Corporate bonds
• Government bonds
• Individual shares in publicly listed companies
• OEICs – Open-ended investment companies
• Exchange-Traded Funds (ETFs)
• Shares in publicly listed Investment Trusts, including REITS – Real estate investment trusts
• UCITS authorised collective investment vehicles
• Unit Trusts

Stocks and shares ISAs that contain various assets, such as shares, ETFs, bonds, and investment trusts, are often referred to as Investment ISAs.

Investing large sums of money

If you have a large sum of money to invest, and you want to invest it as economically as you can from a tax point of view, the article entitled “How to invest £100,000” on the Moneyfarm website is recommended.

You can invest up to £20,000 in ISAs in any tax year. You can have as many ISAs as you want, but you can only open one stocks and shares ISA per annum.  Over time, you may accumulate several ISAs and want to amalgamate them to maximise their potential. Personal wealth specialists like Moneyfarm can help you with a free ISA transfer.

As well as your £20,000 ISA allowance, you can also invest up to £40,000 into your pension or the equivalent of your annual salary each tax year.

If you maximise your ISA and pensions allowances, now knowing the difference between stocks and shares, you might decide to invest the £40K balance in a general investment account. If your ISA and pensions balances are not fully utilised the following year, and you want to take advantage of the tax allowances, you can then transfer shares into an ISA.

Managing Risk

Investments of any kind carry a certain amount of risk; even investing in preference shares or corporate bonds is not totally risk-free. The value of your investment can fall as well as rise, but you can mitigate risk to an extent by diversifying your investment portfolio and investing long-term.

FAQ

What are the fees associated with buying stocks and shares?

There are typically two types of fees associated with buying stocks and shares: brokerage fees and trading fees. The stockbroker charges brokerage fees for facilitating the trade, while the stock exchange charges trading fees for the actual trade.

What are the tax implications of investing in stocks and shares?

The tax implications of investing in stocks and shares vary depending on your country of residence. In general, however, you will be liable to pay capital gains tax on any profits that you make from selling stocks and shares.

Can shares refer to non-stock assets?  

Yes, shares can refer to non-stock assets. While a share is a unit of ownership in a company, it can also include ownership of other types of assets, such as real estate investment trusts (REITs), commodities, cryptocurrency, or other investment instruments.