As an investor, it is very important to understand the terms stocks and shares before venturing into the stock market. Though both terms have been used interchangeably many times which have made many people believe they are the same.
Both stocks and shares denote the same thing, but the two terms have differences. When you refer to stock you are talking about an individual being a part-owner of a company or more. While shares can be referred to as the unit that is owned in a particular company. Stock trading is made possible through the stock exchange.
Also with technology advancement, there is a lot of stock trading software that makes stock trading easy. Let’s take a closer look at the two terms shares and stocks.
What Are Shares
Shares are units that are owned by an individual investor. In order words, you can say shares are owning a small portion of a company. The overall value or worth of a company is called market capitalization and to calculate that. You will multiply the price of a stock by the number of shares that are currently owned by shareholders.
Types of Shares
Investors can only own two major types of shares which are private and public.
The major difference between the two shares is that public shares are listed on the stock market making it easy for investors to buy and sell shares without stress.
However, private shares are not traded on the stock market. It is most times offered exclusively by a private company to its investor or employees.
There are times private companies can decide to change in public companies by offering investors an initial public offering (IPO) and enlisting the company shares on the stock market.
There are two ways to profit from shares is either through capital gains or by generating income with shares. Capital gains are the selling of a share that has increased in worth or value, meaning the company is successfully growing and the price of shares has also increased. And generating income with shares is the dividend that some companies pay to their shareholders.
What Are Stocks
Stocks are issued by companies as a means of raising money or other financial assets to grow the business, pay off debt or launch a new product. Stocks are also referred to as equities which are a type of securities that gives you a stake in a traded company.
Buying stocks means you own a small portion of the company and you become a shareholder. An investor can decide to buy stocks of one company or several companies as the number of stocks you can hold has no limits.
Types of Stocks
There are two major types of stocks namely preferred stock and common stock.
Common stock: is the type of stock that is majorly issued and most people prefer to invest in this type of stock. This stock gives shareholders voting rights which is a vote per share of stock and they can also receive dividends.
Preferred Stock: stockholders with this type of stock do not have voting right like that of common stock but they do receive dividends before them. They also prioritize them over common stockholders in case the company assets are liquidated or the company goes bankrupt.
Stocks can be categorized based on the size of the company as they reflect on its market capitalization as large-cap, mid-cap and small-cap. Shares in a very small company are referred to as micro-cap stocks and the lowest price stock is penny stocks. The common and preferred stocks can fall under the following categories
Blue-chip stocks: this is the share in big and well-known companies with consistent growth which generally pay dividends.
Growth stocks: the earnings in this stock grow at a rate that is faster than that of the market average. Investors buy this kind of stock hoping the capital will appreciate as they don’t pay dividends.
Value stocks: this stock has a low price-to-earnings ratio. Investors buy this stock hoping that the stock price will increase.
Income stocks: investors buy this kind of stock due to the income they generate and the consistent dividend they receive.
Shares and stocks are closely related terms but they are not the same. When you buy stock in a company you are not lending money to the company but you own a certain percentage of the company.
Buying and selling of stocks can be done on the stock exchange through an online broker and there will be the need for you to have a demat and trading account. Stock trading can be very risky but with the right trading tools such as stock trading software. You can take advantage of this technology and become a successful stock trader.