Stocks / Indices
The Difference Between Stocks and SharesJuly 5, 2021
One must enter a level of semantic resolution that leaves the term ‘pedantic’ far behind in a rolling cloud of dust in order to find that petty distinction between the term “stock” and “share” – and even then, it is quite easy to eradicate it.
Some sources go as far as explaining the difference using the sentence: “100 shares of IBM stock” – none actually leading to the original quote, even fewer explaining why “100 stocks of IBM shares” would be incorrect.
So, let’s dive in: What is the difference between stocks and shares (shares and stocks, as I prefer)?
What Are Stocks, What Are Shares?
Stocks and shares refer to those traditional pieces of paper that indicated that the share/stockholder had paid the issuer (usually a company or the previous owner of the stock or the underwriter of the stock offering) money in return for an interest – part ownership – in the company.
These can be (and from now on until further notice, I will use the term shares for the sake of sanity… mine!):
What is a Stock Split?
If a company has nevertheless decided to increase the number of shares ‘out there’, it must resort to a Stock Split, which inevitably lowers the value of its outstanding shares. A 2 for 1 split, for example, will double the number of shares and halve the value of those originally issued. This makes shares more affordable to retail investors and increases liquidity.
It will usually be undertaken if a company’s shares are too high, compared to other company shares in its sector. Through the expressed optimism, the company hopes to increase share demand and drive prices back up.
Another reason for a stock split is for inclusion in an index. Apple, for example, executed a 7 for 1 stock split in 2014, fearing that its inordinately high price would exclude it from the Dow Jones Industrial Average, which fears inordinate sway over its price-weighted average computation by company shares that are too highly valued.
After a stock split, shareholders are usually issued with the number of shares required to bring their investment back to its original value.
What is the Difference Between Share, Stock and Equity?
Ok, let’s go verbal (noun-al, ok).
What IS stock.
Some sources differentiate between:
stock – the capital raised through the issue of… and
shares – the individual units into which the stock has been divided.
They will also add that 3rd term:
equity – which is the entire overall ownings of a company. What it’s worth – contracts, contacts, equipment, real estate… ad infinitum. And take care not to confuse this with
market capitalization – this is the number of outstanding shares multiplied by the value of each one. The owner of the company has no access to its market capitalization. Notice, above, I didn’t write “What its VALUE is”. Equity is inherent, marcap is perceived – related to what people THINK the company is worth. And none of this has anything to do with
Bonds – which is debt. How much the company owes bond-holders, who are not shareholders by any means. Yes, they get a regular payment, but that’s more like interest on a loan. And it’s not included in market capitalization but equity (deduct it from all the rest).
What are Shares?
Our main takeaway is that stock can be considered a more general term (not unlike its close cousin ‘inventory’), whereas shares are more particular (denoting a portion of the whole). US English usage ascribes to both the exact same significance. Consequently, if one were to say that he owns several shares, the implication is that they are all in the same company, whereas several stocks could mean in different companies.
Thus, when speaking in sectarian terms, we like to talk about energy stocks, large-cap stocks, blue-chip or value stocks and so on, but Exxon shares – a share being the smallest denomination of stock (like renminbi and yuan, pounds and sterling).
Other sources will differentiate based on quantity – shares denote individual bits of the company, stock denotes a controlling share. Thus, differentiating based on type (preferred, common, private etc.) will most often refer to shares.
Thus, we usually refer to a stockbroker, not a share broker, the stock market, not the share market. In fact, only the first exists as a single, MS Word Spell-Checker word.
In conclusion: What Are Stocks?
At the end of the day, no trading academy or university degree in finance is liable to default you for interchanging the words stock and share. The difference is mostly semantic and the two are entirely interchangeable.
The main thing is to understand what – in essence – they are, so as to be able to invest in or trade on them or their derivatives through knowledge, not rumour.