Shares
Shares are defined as the units into which the total share capital of a firm is divided or split. It is a fractional portion of an organisation’s share capital, and it also comprises the ground for the ownership interest within the company. The individuals or groups who make the monetary contribution to the company to purchase the shares are known as shareholders. The amount of authorised capital of the company, along with the total number of shares in which it gets split, are mentioned in the Memorandum of Association. But the division of shares along with the specific obligations and rights is recommended by the Articles of Association of that company. As per the Companies Act, any organisation can issue the following two types of shares:
- Preference shares – Preference shares (also known as preferred stock) come with a dividend option payable to the shareholders before the equity shares. In case the enterprise enters insolvency, the members who own these preference shares are also designated to get paid from the assets of a company. It is important to note that most of the preference shares have the option of a fixed dividend, and it gets paid regardless of whether the firm makes a profit or not. However, the owners of these shares do not possess any voting rights, unlike equity shareholders.
- Equity shares – The holders of equity shares (also known as ordinary shares) are the authentic owners of the company. They, however, do not have the option of a fixed dividend, and they get paid only when a company makes a profit. The owners of equity shares possess voting rights for the selection of the management, and thus they have control over the working of the organisation. The equity shareholders get a dividend only after the company pays off the creditors and the preference shareholders.
Stock
Stock is defined as a type of investment done by both individuals and businesses when they put money in an organisation with the aim to fetch higher returns. It is a common term that is used to describe ownership of a part of the company that one has invested in. It also entitles the owner of a stock to a proportion of the company’s assets and profits that is in proportion to the value of their shares. These stocks are bought and sold mostly on the stock exchange markets, and they are the foundation for many investor portfolios. The transactions for purchasing, selling as well as trading of stock have to conform with the government rules and regulations to protect the investors from any fraudulent practices.
Difference between Shares and Stocks
Both shares and stocks can help individuals and organisations put their money in firms along with getting a share of the profits. These two financial instruments are also a very important source for companies to raise capital for the firm both in the short and long run. However, there are some crucial points of difference between shares and stocks, and we will discuss them below to get a better understanding of the topic:
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A share is a financial instrument that represents the part ownership of a company. |
A stock is a financial instrument that represents part ownership in one or more organisations. |
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The value of two different shares of a company can be equal to each other. |
The value of two different stocks of a company may or may not be equal to each other. |
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There is a nominal value that is associated with shares. |
There is no nominal value that is associated with stocks. |
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There is zero possibility of an original issue in the case of shares. |
There is a possibility of an original issue in the case of stocks. |
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The shares of a company are either fully paid up or partially paid up. |
The stocks of a company (or a group of companies) are always fully paid up. |
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Shares have a narrower scope when compared to stocks. |
Stocks have a wider scope when compared to shares. |
Conclusion
Both shares and stocks have a very important role to play for any company that wishes to generate sufficient capital to fulfil its long and short term needs. Although there are several differences between these two instruments, both companies and investors use them on a regular basis to achieve their financial goals.
Frequently Asked Questions
What are the different types of stocks?
There are mainly two different types of stocks: common and preferred. Common stock allows the investors to get the right to vote during shareholders’ meetings, thus giving them a direct stake in the running of an organisation. Preferred stock, on the other hand, are not provided with any voting rights, but they receive dividend payments ahead of the common stockholders.
What are the main features of preference shares?
The main features of preference shares are as follows:
- Preference shares provide a long term source of finance for any company.
- The dividend that is payable on these shares is usually higher than the interest on debentures.
- The preference shareholders also get the advantage of a fixed rate of dividend irrespective of the total volume of profit made by a firm.
Also See:
- Difference between Gross Investment and Net Investment
- Difference between Fixed Capital Account and Fluctuating Capital Account
- Difference between Comparative Financial Statement and Common Size Financial Statement
- Difference between Traditional Commerce and E-Commerce
- Meaning and Characteristics of Not for Profit Organisations
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