Posted on: 21-02-2022 in Investments
If you ask most people what the difference is between a crocodile and an alligator, they probably wouldn’t be able to tell you.
Chances are, if you ask an investor if they know what the difference is between stocks and shares, they will also be stumped.
Although the two words are often used interchangeably, they are some key differences. Here, we take a closer look at stocks and shares and break down the differences between the two.
Let’s start by looking at each term individually.
When a public company needs to raise money for new projects or expand, it can issue stock.
The goal here is to attract investors. By investing in stocks, you gain partial ownership of the company. Your financial returns are usually in the form of dividend payments.
These payments are a portion of the company profits. Typically, these are paid as either quarterly or annual dividends.
Stock is traded on a stock exchange, allowing investors to buy and sell. Broadly speaking, there are two types of stock; common and preferred.
As the name implies, these are the most common stocks that a company issues. Stockholders that hold common stocks have voting rights, usually one vote for every share of stock you own.
Those that own preferred stocks usually have no or limited voting rights. However, these types of stocks can receive higher dividends than common stocks and come with some added security.
If a company goes into liquidation, those who hold preferred stocks are reimbursed ahead of common stockholders.
As a company expands, it can issue more stocks. In some cases, and to attract a broader range of investors, a company may announce a stock split.
Shares are measurable units of stock. When a company issues stock, it is broken up into shares. If someone owns shares, they hold a certain percentage of the company’s total stock.
Although a share represents the smallest unit of stock, you can technically go smaller. Some brokerage services allow you to buy fractional shares. In other words, a portion of a share.
Being able to own shares in huge companies such as Apple may be out of reach for the majority of investors, especially if their money is tied up elsewhere. Fractional shares make it more affordable to buy into a company.
Shares do not need to be tied to one specific company; they can also refer to other types of investments.
For example, you could hold shares in a mutual fund. These are broken down into either passive funds or active funds, allowing you to buy shares in multiple companies at once.
As mentioned above, a company issues stocks/shares to attract investors and raise cash. Another way to raise money is through corporate bonds.
If you are buying bonds, you are essentially loaning the company money. When a company borrows money from you in the form of a bond, they promise to pay it back with interest.
The key difference between a stock and a bond is this; stocks represent ownership, while bonds represent debt.
Bonds don’t tend to yield the same type of returns that you get with stocks. Over 10 years, the S&P 500 had an average annual return of 10.65%. The U.S. bond market saw a return of 3.92% over the same period.
Still, one of the benefits of bonds is their level of risk. Because they are considered low risk, bonds can help with your asset allocation strategy to spread the risk in your portfolio.
Although we use the terms interchangeably, there is a difference between stocks and shares.
In a nutshell, the biggest difference is this. A stock is a generic term for ownership in a company, while shares represent a precise proportion of ownership.
So, if you own stock in Amazon, it means you own a portion of that company. If you own 200 shares in Amazon, it’s clear how much of that company you own in units.
Also, stocks can be held in one or a collection of companies, unlike shares that are held in a particular company. So, person A may own automobile stocks while person B owns shares in Ford. It doesn’t mean you can’t own shares in multiple companies. However, the shares themselves will be in a specific company.
Another important distinction is that stocks specifically refer to company equities, a type of security traded on the stock market. On the other hand, shares could be units of stock, as we previously discussed or other kinds of investments.
For example, with mutual funds or exchange-traded funds, you hold shares in companies, not the entire stock.
The financial markets can be confusing, especially if you are a new investor. Working with an experienced financial adviser can help pick the right types of investments to reach your financial goals.
At Holborn Assets, we have over two decades of experience working with clients to build a profitable investment portfolio.
Our experts work closely with clients to understand their needs and both their long-term and short-term goals. This allows us to develop bespoke strategies tailored specifically to the individual.
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