The terms "shares" and "stocks" are often used interchangeably, leading to confusion among investors and those new to the market. While both represent ownership in a company, there are subtle differences worth understanding.
This article will explore what shares and stocks mean, the types of stocks, and why people buy stocks and shares.
1. Shares? Stock? Are they the same?
The terms "stocks" and "shares" are often used interchangeably to refer to financial equities, specifically securities that denote ownership in a public company (traditionally called stock certificates). When a company issues stocks, it is selling ownership shares to investors. These investors become shareholders and are entitled to a portion of the company’s profits and assets, which can provide income in the form of dividends. Furthermore, if the company performs well and its stock price increases, shareholders have the option to sell their stocks for a profit.
On the other hand, "shares" refer to units of ownership in a company or investment fund. While shares can include stocks, they also encompass other types of investments, such as mutual funds or exchange-traded funds (ETFs).
A key distinction between stocks and shares is that "stocks" typically refer specifically to equity securities of a company, whereas "shares" can pertain to various types of securities, including debt securities or derivative instruments.
In summary, both stocks and shares represent ownership interests in a company or investment fund, but they can denote slightly different concepts and possess unique characteristics.
2. Why do companies issue stock?
Companies issue stocks to raise funds for various purposes, including:
Paying off debt
Launching new products
Expanding into new markets or regions
Enlarging existing facilities or constructing new ones
3. Why do people buy stock & shares?
In addition to earning a profit from buying and selling securities, investors purchase stocks for various reasons. Here are some key motivations:
Capital appreciation: This occurs when a stock increases in price.
Dividend payments: Investors receive these payments when a company distributes a portion of its earnings to stockholders.
Voting rights: Shareholders can vote on important company matters, allowing them to influence decisions.
4. Types of Stocks
Common and preferred stocks are the two main types of stock shares. They carry different rights and privileges and trade at different prices. Common shareholders have the right to vote on company matters and personnel decisions, while preferred shareholders do not possess voting rights. However, preferred shareholders have priority in repayment if the company goes bankrupt. Both types of shares may pay dividends, but preferred shareholders are guaranteed to be paid first if a dividend is declared.
Common and preferred stocks are generally categorized into two types:
Growth stocks: These are shares in companies expected to grow at a significantly higher rate than the average market growth. Investors seek growth stocks because they believe these companies have better potential to expand their businesses, gain market share, and enhance competitiveness in the coming years.
Value stocks: Typically issued by mature and stable companies, value stocks are characterized by steady profitability, undervalued prices, high safety, and regular dividends. They often exhibit low price-to-earnings and price-to-book ratios. In contrast to growth stocks, value stocks tend to have lower risk and volatility.
5. Summary
This article explores the meanings of the often-confused terms 'shares' and 'stocks,' the various types of stocks available, and the reasons why investors choose to buy shares and stocks. By the end, readers will have a clearer understanding of these fundamental elements of equity investment.
