The terms “stock” and “share” are used so commonly that they seem to refer to the same thing. Even popular news and magazine articles may occasionally be found guilty of treating the terms as synonyms. For example, an article in Forbes lists the top 10 most expensive stocks in America, but each of the ten listings names the price of individual shares. While this is not technically inaccurate, it can lead to the impression that the terms stock and share can be used interchangeably.
But are stocks and shares the same? The difference between stock and share is more than a matter of mere vocabulary. In this post, we’ll explain the difference between stocks and shares and why it matters.
Stocks and Shares Definition
It may be helpful to clearly define our terms. You’ll see that stocks and shares are closely related, but they each have a slightly different meaning.
Stocks
Stocks allow investors to have ownership in a given company. Stocks can allow the company to raise capital for expansion projects or to cover operating costs. When you invest in stocks, you may be issued a “stock certificate” that serves as proof of ownership in that company.
Shares
Shares represent the smallest denomination of a company’s stock. When you own shares in a company, you own a percentage of that company’s overall stock.
Understanding Types of Stock
It’s important to understand that stocks come in two general types: Common stock and preferred stock.
Common Stock
Common stocks are what you might generally think of when you think of owning stocks. Common stocks are issued by publicly traded companies. Common stockholders are granted voting rights. If the company pays dividends, then common stockholders receive these dividend payments, as well.
Preferred Stock
Preferred stockholders do not have the same voting rights as common stockholders. However, if the company should go bankrupt, preferred stockholders are given greater priority when the company’s assets are liquidated.
Like common stockholders, preferred stockholders can receive dividends.
Understanding Shares: Market Cap
When it comes to shares, it’s important to be familiar with the term “market cap.” A company’s market cap refers to its overall value, sometimes referred to as the market capitalization.
You can actually calculate the market cap very easily. Simply multiply the cost of each share by the number of shares currently owned by shareholders. This market cap will indicate the company’s overall value, but because the number of outstanding shares will vary with time, so will the company’s market cap.
Market cap is a common way that companies are classified. Below is a breakdown of common terms used for different-sized companies based on their market cap:
- Micro Cap: $50 million to $300 million
- Small Cap: $300 million to $2 billion
- Mid Cap: $2 billion to $10 billion
- Large Cap: $10 billion or higher
- Mega Cap: $200 billion or higher
Small-cap companies tend to be smaller, but can also provide greater room for growth. That means that owning shares in an established, large-cap company isn’t necessarily a better investment than owning shares in a small-cap company.
Understanding Shares vs. Stocks
The terms stock and shares are directly related. When you invest in the stock market, you can legitimately say that you own both stock and shares. But stock refers to the company’s total stock availability, while shares refer to individual units of stock.
In other words, “stock” refers to what you’re investing in. “Shares” tell you how much of that investment you’re making.
Stock vs. Share: The Similarities
Both stock and share indicate that you have ownership in a company. Shares are simply the way that the company’s stock is divided up.
According to the Securities and Exchange Commission (SEC), you become a principal stockholder when you own 10% or more of a company’s total shares.
In this respect, stocks and shares can be essentially synonymous. In fact, it’s perfectly accurate to use the words “stockholder” and “shareholder” interchangeably, provided the terms are used in the context of one specific company.
Stock vs. Share: The Key Differences
What, then, is the difference between shares and stocks? There are a number of critical differences that are important to understand.
Relationship to a Company
Stocks and shares are related to company ownership in different ways. To say, “I own stocks” can mean you own stocks in one or more companies.
For example, you might own stock in Amazon, Microsoft, Disney, or others. But to say, “I own shares” is more specific. Owning shares means you own stock in one particular company, and the number of shares indicates how much of that company you own.
The Value of Stocks vs. Shares
Because stocks can apply to more than one company, different stocks can have wildly different values. But because shares come from the same company, every share will have an identical value.
For example, Stock X and Stock Y might be trading at very different prices, but each share of Stock X will be sold for the exact same price.
That doesn’t mean that share prices are static, of course. If a company’s stock price increases, so will the value of its shares. But when share prices increase, the value of each share will increase by an identical amount.
So while stock values will differ across the market, there will never be a time when a company offers shares at two different values.
Original Issue
Some companies issue stocks directly to their stockholders. This is known as original issue. The practice is commonly used by companies trying to raise capital. By contrast, shares cannot be originally issued by a company.
Nominal Value
Stocks do not typically carry a nominal value. Shares, on the other hand, can carry a nominal value (e.g., $5.00 per share).
Other Uses of “Share”
The term share is most commonly used to refer to ownership of a particular stock, but it’s also possible to use the term to refer to other types of investment, such as owning shares in a mutual fund.
Why the Difference Between Stock and Share Matters
The distinction between stock and share is more than a matter of semantics. Understanding these key differences has immense practical value.
Understanding Your Investments
When you understand the difference between stocks and shares, you are better equipped to make and monitor your financial investments. For instance, you’ll understand that your investment portfolio contains a variety of stocks, but each stock purchase is measured by a number of shares.
If you’ve struggled to understand this distinction so far, think of it like packing a backpack before a hiking trip.
You pack your bag with a series of different containers, but each container includes the same exact item. So you might have a cereal container, a fruit container, and a snack container, but if you open each one, you’ll see that it contains the same contents.
The same is true of your investment portfolio. You might own stocks in companies like Sony, Amazon, and Costco, but each of these investments will be made up of unique shares of the company’s stock.
Becoming Financially Conversant
Secondly, it’s important to understand shares and stocks because it enables you to be more financially conversant. That doesn’t just mean being able to sound good at parties; it also means you’re able to read and digest financial advice from major publications and web-based research platforms.
This will enable you to make future investment choices that can maximize the gains you receive from your investments.
A Shifting Corporate Mindset
According to the New York Times, America’s top companies are experiencing a shift in mindset. Seeking to combat economic inequality, companies are seeking to deliver value to their customers rather than merely cater to shareholders.
It’s unclear what impact this may have to current investors, but it may indicate that owning shares in any one company offers no greater benefit than owning stock in multiple companies.
Improve Your Financial Knowhow with Gorilla Trades
We hope you’ve enjoyed this deep dive into the difference between stocks and shares. Remember, stock is the broad term that refers to what you’re investing in, while shares refer to the investment you make in one particular company.
We also hope you’ll stick around because there’s always more to learn! At Gorilla Trades, we hope to be your go-to resource for understanding the stock market and the world of investing.
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