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Tuesday, February 15, 2011

The meaning of stocks vs. shares

In a nutshell, not all shares are stocks, but all stocks are shares. Similarly by analogy, not all fruits are apples, but all apples are fruits. To explain further, stocks represent a numerical share of ownership in a company whereas shares represent investment proportion in a wider range of financial instruments such as mutual funds, exchange traded funds, and stocks.

For example, X owns 500 shares of XYX Fund, and 100 shares of EFG corporation in the form of stock. Stocks and shares are both ownership of financial instruments and the two terms are sometimes interchanged for each other, however shares have a wider range of ownership possibilities whereas stocks are definitively more limited to specific financial instruments. Although related, equity, shares and stock are slightly different in meaning as evident below:



Cultural and historical meaning of stock and shares


Historically shares and stocks can also be thought to hold similar meaning as present albeit imbibed with historical economic connotations. In other words, outside any specific historically unique connotations, stocks such as those representing share ownership in Joint-stock companies held similar meaning. (www.historyworld.net)

Culturally, shares and stocks are interchangeable. For example, the United Kingdom refers to stocks as shares (www.proz.com) i.e. in the United States British shares are the equivalent of American stocks. Stock may also refer to inventory as in product stock such as grain, cattle etc. This latter meaning of stock is not connected to the financial instrument of ownership via monetary means, but rather physical ownership.

Differences between stock and shares


To distinguish further stocks and shares can be classified separately in terms of what they refer to, how they are used, and where they are traded. The following illustrates features of stocks and shares as separate financial instruments and serves to draw the subtle difference in meaning.

• Common stock, and preferred stock: Corporate ownership/equity with different 'rights'. For example common stock hold voting privileges whereas preferred stock have first rights of redemption in the event of company liquidation.

• Stocks are traded on stock exchanges and owned by stock funds.

• Share ownership does not necessarily imply rights of ownership other than monetary value and in the case of commodities, underlying products.

• Shares and stocks are both measured in currency and units such as dollars and numerical quantity not necessarily limited to whole numbers ex. 15.7 shares of XYZ fund.

Investing in stocks and shares


Investing can involve stocks and/or shares. The decision to invest in one or the other or both these financial instruments in so far as they are distinguishable depends on the investors financial goals, risk tolerance and market of investment. Stocks that are managed by funds that issue shares may provide more price stability and risk management, however there may be more fees associated with this type of ownership.

Shares of stock can be issued during incorporation of a company whether it is a privately held small business, partnership, large corporation or publicly held corporation. Shares of non-profit corporations can also be held and example the publicly owned Green Bay Packers football team. In such cases, appreciation of value may be more limited than with private ownership.

Other financial instruments in which shares of stock can be held are commodities. Commodities are a part of futures trading which involves price movements based on changes in the underlying products. The relationship between value and product is thus more important to pricing than in the case of corporate ownership where fundamentals such as revenue and earnings per share hold relevance.

Stocks and shares are often considered interchangeable terms however slight distinctions can be made for purposes of better understanding the investment world and its terminology. Historically and culturally there are also some minor differences in meanings and usage of the word however, for the most part both shares and stocks generally refer to financial trading and ownership of one kind or another.

Investing in shares and stocks depends on investment variables and individual investor factors such as market of choice and investor attributes. The risk, and pricing of various stocks and/or shares are determined in part by the mechanisms by which they are exchanged and the markets and economies in which such exchange takes place.

Sources:

1. http://www.investopedia.com/ask/answers/140.asp
2. http://in.answers.yahoo.com/question/index?qid=20071202093835AA0dN3d
3. http://www.historyworld.net/wrldhis/PlainTextHistories.asp?groupid=462&HistoryID=aa49
4. http://tinyurl.com/4tes8mf