What are stocks?
Often times when a company wants to raise capital for business expansion or to cover operating costs, the company can either borrow money from investors through issuing corporate bonds, or it can issue stocks that entitle investors to ownership in the company.
Stocks are one of many financial-securities which indicate a percentage or part-ownership of an investor in a company.
What are shares?
A “share” is to specify a portion of ownership in a particular company. Stocks are further divided into shares: a share is the smallest unit of a company’s stock.
Therefore, each unit of stock is a share in a company. So, each share of stock represents a piece of one’s ownership in a particular company’s ownership.
When someone owns “shares” in a company, that means he or she owns stocks that amounts to a certain percentage of the company’s total stocks.
Also, when someone owns “stocks,” in a company, he or she could be talking about a portion of stock from one particular company, or several companies.
A person could hold 400 million shares of Coca-Cola, 9.4% of the 4.2 billion shares the company had outstanding. Those 400 million stocks would actually represent 9.4% of shares in the company, but it would still be 400 million securities issued by the company to investors as proof of ownership.
Key differences between stocks and shares
Buying one or several stocks in a company isn’t lending the company money in expectation of it being paid back, with interest; it is all about buying a piece of ownership in the company, with your interest in the company’s success in terms of dividend payout or capital gain
As a shareholder of the company, you are entitled to a share of its earnings and assets. When the company performs well, you can make additional money by selling your stock at a higher price than that at which you bought it.
Since some people tend to use the terms stocks and shares interchangeably, the term shares could refer to other kinds of investments, such as a mutual fund. In mutual funds, you may own shares, but not the actual whole stocks. You own a portion or shares of the stocks held in total by the mutual funds.
There are two more terms which may sound totally new to people who just got into the investing world, these refer to two types or classes of stock shares offered.
Each has its own rights and privileges, and traded at different prices.
For example, Common shareholders have the authority to question and vote for C.E.O’s, board of directors and approve for an action that the company is about to make.
Shareholders owning Preferred stocks do not have voting rights, but have priority in getting repaid if the company goes bankrupt.
Also, from the two classes of stock shares, some companies also categorize different classes of stock to fit investors’ needs. Most of the time the different classes of stock shares are designated alphabetically, as in “A” and “B,” for as many classes as the company wants to distinguish, and given different voting rights.
For instance, the founder of a company may have one class of shares, given four votes per share, while another class might be issued to the majority of investors, and given just one vote per share, or as preferred shares - with no voting rights.
Mostly, founders of a company create two tier class of shares when they go public. This is to ensure that they maintain control over the company.
There is another type of shares known as advisory shares which are given to business advisors. Mostly the advisors receiving such kind of shares are high-level executives of the company or the company founders. Advisory shares are usually rewarded as stock options.
7 Major differences between stocks and shares
1. Ownership: Owning stocks means you are entitled to one or more companies whereas owning shares of a company it means that you are entitled to that one particular company.
2. Denomination: A person who owns stocks may own multiple stocks having difference values whereas person owning shares may own multiple shares of the same value
3. Original issue: Stocks could be issued at any time when the company is in need of funds; shares are mostly issued during IPO (Initial Public Offering)
4. Nominal value: Shares tend to have a nominal value associated with them, such as $10 a share, while stocks do not have nominal value.
5. Numeric value: Shares do have distinct number; stocks do not have a distinct number.
6. Paid up value: Stocks are always fully paid up by their nature; shares can be either fully paid up or partially paid up.
7. In terms of transfer, stocks’ preference is lower because they cannot be in fractions; shares have a higher preference because they can be in fractions in a transfer.
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