Stocks vs Shares: Legal Definition, Characteristics, Issuance, IPOs and Dividends
What are Stocks and Shares?
Stocks represent ownership in a company, divided into shares, which are individual units of that ownership. The main difference is that “stock” refers to the general ownership in a company, while “shares” specify the number of units of that ownership.
Stocks vs Shares Legal Definition
The difference between stocks and shares can be confusing. “Stocks” and “shares” are frequently used together in stock market investments. Although they have a strong connection, the two have minor nuances that investors should know.
Holding stocks provides ownership in a company. A company can issue shares on the public market (or privately).
However, investors are entitled to a portion of the company’s profits and assets when they buy stock, becoming partial owners. Stocks can take the form of common or preferred stock.
Shares are the individual units of stock which investors can purchase. Issuing stock splits the ownership of a company into shares, which represent smaller units.
For instance, an investor who purchases 100 shares of a company that has issued 1,000 shares holds a 10% ownership in the business.
Characteristics of Stocks and Shares
- Ownership in Stocks and Shares: Stocks represent company ownership; shares are the individual units investors buy. Stocks refer to the ownership of a company, while shares represent the actual units of that ownership that investors can purchase.
- Dividend: When a company is profitable, it may distribute dividends to shareholders. Dividends are typically allocated on a per-share basis. An investor who holds 100 shares of a company receiving a dividend of £1 per share will be entitled to a dividend payment of £100. Not all stocks offer dividends. Instead of distributing profits to shareholders, some companies reinvest them into their business.
- Voting Rights: Shareholders can vote on particular corporate choices, including selecting board members and authorising mergers and acquisitions. Generally, the number of votes a shareholder is entitled to, is relative to the number of shares they possess. An investor who owns 100 shares of a company with 1,000 shares outstanding will be entitled to 10% of the total votes.
- Preferred vs Common: There are two types of stocks – common and preferred. Holders of common stock possess ownership in the company and usually have voting rights. Preferred stock generally does not allow shareholders to vote but offers them priority over common shareholders regarding dividends and liquidation proceeds.
- Liquidity of Stocks and Shares : Shares are generally more easily tradable than stocks, as they are often listed on a stock exchange. Investors may purchase or dispose of shares through the services of a broker or via an online trading platform. By contrast, stocks are not typically traded on an exchange and are usually owned by large institutional investors like mutual funds.
What are penny stocks?
Penny stocks are low-priced shares of small companies. They are known for their high volatility and risk, but also offer potential for significant gains. These stocks are typically traded outside of major market exchanges.
Difference between Stocks vs Shares
| Difference | Stocks | Shares |
|---|---|---|
| Ownership | Represents ownership in a company | Refers to the individual units of ownership that are sold to investors |
| Dividends | Some stocks pay dividends to shareholders | Dividends are paid out on a per-share basis |
| Voting Rights | Stockholders have voting rights | Voting rights are typically proportional to the number of shares owned |
| Preferred vs. Common | Stocks can be issued as either common or preferred stock | Shares typically do not have different classes, but in some countries, there are share classes such as redeemable and preferential |
| Liquidity | Stocks are not as liquid as shares | Shares are more liquid and can be easily bought and sold on an exchange |
How Do You Buy Stocks And Shares?
To buy stocks and shares, you need to open a brokerage account with a financial institution or online platform. Once your account is set up and funded, you can search for and select the stocks or shares you wish to purchase.
Place an order specifying the number of shares and price, and once the order is executed, the stocks will be added to your portfolio, reflecting your ownership.
Can Private Companies Issue Shares?
Private companies can issue shares, although they are not available for trading on a public exchange. Private companies can issue shares to raise capital, similar to public companies. The issuance of shares in a private company is typically subject to stricter conditions than in a public company.
In a private company, the shares are typically held by a limited set of stakeholders, including founders, employees, and private investors.
Generally, private companies issue shares through private placements, where the company distributes shares to a few investors, often selectively.
Private company shares are unavailable for public trading and are less liquid than public company shares.
Investing in private company shares may be challenging due to the difficulty of selling them and the time needed to see a return on their investment.
Shares in private companies may be subject to restrictions on transferability, which may require the company’s consent or adherence to certain conditions, such as a minimum holding period before they can be bought or sold.
Read post: What are Foreign Invested Enterprises (FIEs)? Laws, Regulations and Economic Development
What Is An Initial Public Offering (IPO)?
An Initial Public Offering (IPO) is the process through which a private company goes public by offering its shares to the public for the first time. This significant financial event allows a company to raise capital by selling stocks to institutional and retail investors.
The IPO process involves regulatory filings, setting an initial share price, and listing the shares on a stock exchange. It marks a company’s transition from private to public ownership, opening new funding and growth opportunities.
Are Bonds Equivalent To Stocks?
Bonds and stocks are both forms of investment that can be purchased and traded; however, they exhibit distinct attributes and represent different types of investment. Bonds represent debt, and stocks represent ownership.
When an investor purchases a bond, they are providing money to the issuer, e.g., a corporation, municipality or government, in exchange for periodic interest payments and the return on their principal investment following the expiration of the bond’s term.
When an investor purchases a stock, they obtain ownership in the company and consequently have a claim on its assets and earnings.
Bonds usually have a predetermined rate of return, while stocks can lead to capital gains and/or dividends depending on the stock’s performance.
Bond investments are usually considered safer than stock investments due to their predictable return and typically lower price volatility.
Bonds generally provide lower returns than stocks, which may lead to a decreased potential for long-term growth.
Bonds and stocks diverge in their placement within a company’s capital structure. Bonds are generally issued before stocks, meaning bondholders have priority over stockholders regarding the company’s assets in bankruptcy or liquidation.
Stockholders have a right to the company’s assets after bondholders, and other creditors have been paid.
What Are Dividends?
Dividends are payments made by a company to its shareholders, usually derived from its profits. They are a way for companies to distribute a portion of their earnings back to investors.
Dividends are typically paid in cash, but can also be in the form of additional shares. They are often seen as a sign of a company’s financial health and a source of regular income for investors.
Conclusion: Stocks vs Shares
Stocks and shares bear a close relationship with one another, but they are not interchangeable. Stocks indicate ownership in a company, with individual units of ownership referred to as shares which investors buy.
Knowing the distinctions between stocks and shares can enable investors to be better informed when investing and understand the intricacies of stock market operations.
