While shares and stocks both relate to ownership in a company, their differences in specificity and usage are important to grasp. Shares are tied to a specific company and come with unique rights and responsibilities, while stocks offer a broader, more general perspective on equity investments. Being aware of these distinctions helps investors better navigate the financial world and communicate more effectively about their holdings. Whether you’re a novice investor or a seasoned trader, understanding these terms ensures clarity and precision in your investment journey. Shares and stocks are two most common words used by every investor in the stock market. In layman language both are same but there are some differences depending on the context. Let’s look at this in detail today.

Shares: Ownership in a Specific Company

Share generally refers to an equity owned in a specific company. The number of shares generally defines the percentage ownership of a company. Shares is a very specific term that refers to the smallest unit of ownership in a specific company. When an individual buys shares of a company, they essentially acquire a portion of that company’s equity. For example, if a company issues one million shares and you own 10,000 of them, you own 1% of the company. Shares can be further classified into different categories, such as common shares, preferred shares, or even equity shares depending on their rights and privileges.

Ownership of shares often comes with specific rights, such as the ability to vote on company decisions at shareholder meetings or to receive dividends, which are payments made from the company’s profits. Shares are also tied directly to the performance of the individual company; their value rises and falls depending on the company’s financial health, market conditions, and investor sentiment. For instance, owning shares in a rapidly growing tech company may yield significant capital gains if the company outperforms expectations.

Shares are specific to one company, and when investors refer to “shares,” they are usually discussing their holdings in a particular organization, such as “I own 50 shares of Reliance.”

Characteristics of Shares

• Ownership in a specific company- A share is the smallest unit of ownership in a particular company. When you buy shares, you essentially own a fraction of the company.

• Denomination- Shares represent a specific portion of the company’s equity and are often issued in a fixed denomination. For instance, a company might issue 1,000 shares, and owning 100 of those would mean you own 10% of the company.

• Dividends- Dividends are often paid to the shareholders on a quarterly/monthly basis depending upon the company.

• Price Volatility- The price of the stocks keeps on fluctuating depending upon the market conditions.

• Capital Appreciation- If the price of the stocks bought by investors gradually increases over the time, it leads to high capital gains.

• Risk- Stocks are risky, when the price of stocks increase it leads to gains but can cause losses of large amounts of money if the market is unstable.

• Liquidity- We are easily able to sell off the shares.

• Market Price- Stocks have a market price that keeps on fluctuating depending upon the condition of the market. It also depends upon the company’s performance and broader market trends.

Common shares vs preference shares

What are common shares?

When we buy a common share which is also known as common stock we are actually buying a portion of the company. Although a common stockholder does not have any voting rights in the decisions taken by the company. The price of common shares is fluctuating. The price of the share can increase or decrease depending upon the market’s scenario. Common shares have easy liquidity, meaning that they can be bought or sold off relatively easily.

Common shares and preference shares represent two different forms of equity ownership in a company, each with unique characteristics, rights, and privileges.

• Ownership Rights: Common shareholders are considered the true owners of the company and usually have voting rights, which allow them to participate in key company decisions during shareholder meetings.

• Dividends: Dividends are paid to common shareholders only after preference shareholders are compensated. Dividend payments are not guaranteed and depend on the company’s profitability.

• Risk and Return: Common shares carry higher risk but offer higher potential returns through capital appreciation if the company performs well.

• Liquidation: In the event of liquidation, common shareholders are the last to be compensated after creditors and preference shareholders.

What are preference shares?

Preference shares are usually given more priority than the common shares. Preference share stockholders are always first in the line in case of company’s liquidation.They provide higher security than common shares due to priority in dividends and liquidation, but they come with less potential for growth and typically do not offer voting rights.

• Fixed Dividends: Preference shareholders are entitled to a fixed dividend, often making them more stable compared to common shares.

• Priority: They receive dividends and repayment of capital before common shareholders.

• Limited Voting Rights: Typically, preference shareholders do not have voting rights unless specified.

• Risk and Return: Lower risk compared to common shares, but with limited potential for capital gains.

• Special Variants: Companies may issue convertible preference shares, which can be converted into common shares, or redeemable preference shares, which can be repurchased by the company.

Overall, preference shares should be preferred by the investor. Although its price/value has less potential to increase, the investor should definitely invest in preference shares as it provides a higher security than common shares due to priority in dividends and liquidation.

Bonus Shares vs Right Shares

Bonus shares and right shares are corporate actions designed to reward shareholders or raise additional capital. While both involve issuing new shares, their purposes and mechanisms differ significantly.

What are Bonus Shares?

As the word suggests, ‘Bonus Shares’ typically mean some additional shares that are given to existing stockholders for free of cost. The number of bonus shares depends upon the number of shares the stockholder already has. Depending upon the number the company gives out free shares.

• Impact on Share Capital: Bonus shares increase the total share capital but do not change the shareholders’ ownership percentage.

• Example: A 1:5 bonus issue means a shareholder holding 5 shares will receive 1 additional share.

• Impact on Value: While the number of shares increases, the share price is adjusted downward, keeping the overall market capitalization the same.

For example, if you own about 200 shares of reliance then you would probably get 800 bonus shares for a 1:4 bonus issue. But the big question is, ‘ Why do companies give out free shares?’

1. Reward Shareholders- By giving out free shares in a way the company is distributing a fraction of its profit to stockholders. It is a good method if the company wants to conserve its cash.

2. Increase Liquidity- By lowering the market price of each share, bonus shares can make the stock more accessible to smaller investors.

3. Positivity- It spreads a sense of positivity among the public that the company is functioning well and is earning a good amount of profit.

What are Right Shares?

Right shares are an essential concept in corporate finance, representing a method by which companies raise additional capital from their existing shareholders. A rights issue involves offering current shareholders the opportunity to purchase additional shares at a discounted price, in proportion to their existing holdings, before the company offers those shares to the general public. This process ensures that shareholders have the first right of refusal to maintain their proportional ownership in the company.

1. Proportional Allocation: Indian companies typically specify the ratio of new shares offered to existing holdings, such as 1:3 or 2:5. For example, in a 1:3 issue, a shareholder holding 300 shares can purchase 100 additional shares.

2. Discounted Price: The right shares are offered at a discount to the prevailing market price, making the offer more attractive to shareholders.

3. Regulatory Oversight: SEBI ensures the rights issue process is conducted transparently, protecting investors. The company must disclose details such as the purpose of the fundraising, issue ratio, and pricing in the Letter of Offer.

4. Tradability: In India, rights are often renounceable, meaning shareholders can sell their entitlement on the stock exchanges if they do not wish to subscribe.

Example of a Rights Issue & Bonus Issue in India

A prominent example is Reliance Industries Limited’s rights issue in 2020, which was one of the largest in India. The company announced a 1:15 rights issue, meaning shareholders could purchase one additional share for every fifteen held, at a price of ₹1,257 per share. This price was offered at a discount to the prevailing market rate. Reliance Industries used the proceeds to reduce debt and strengthen its balance sheet, and the issue was well-received by investors.

In 2018, Tata Consultancy Services (TCS) announced a 1:1 bonus issue, meaning shareholders received one additional share for every share they held. The record date was set for June 2, 2018, to determine eligibility. This move doubled the company's paid-up share capital and adjusted the stock price proportionally (e.g., from ₹3,500 to ₹1,750). The bonus issue aimed to reward shareholders, celebrate TCS's 50th anniversary, and enhance liquidity in the market. It reflected TCS’s strong financial health and boosted market sentiment positively.

Stocks: A Broader Term for Equity Ownership

Stocks is a broader term for ownership.It means a collective ownership of stakes in multiple companies. When someone says “ I own stocks” , it generally means the portfolio ownership of an individual. It does not specify how much equity one owns in a specific company.

The term does not specify any particular company and is often used to describe a person’s overall equity investments. The term “stocks” is commonly used in a broad sense to discuss equity markets and trends. It is a collective term that may encompass shares from different companies and industries. For instance, an individual may hold stocks in a mix of technology, healthcare, and financial services companies, each comprising shares of individual organizations within these sectors.

Common Stocks vs. Preferred Stocks

What are Common Stocks?

Common stock is primarily a form of ownership in a corporation, representing a claim on part of the company's assets and earnings. If you're a shareholder, this makes “part-owner,” but this doesn't mean you own the company's physical assets like chairs or computers; those are owned by the corporation itself, a distinct legal entity. Instead, as a shareholder, you own a claim to the company's profits and assets, which means you are entitled to what's left after all other obligations are met.

• Ownership and Voting: Common stockholders typically have voting rights and can influence major corporate decisions, such as electing the board of directors.

• Dividends: Dividends are variable and not guaranteed, making them dependent on company profits and board decisions.

• Growth Potential: High growth potential through capital gains if the company performs well.

• Priority in Liquidation: Common stockholders are paid last in the event of bankruptcy or liquidation.

What are Preferred Stocks?

Preferred Stock is a distinct class of stock that provides different rights compared with common stock. While both types confer ownership in a company, preferred stockholders have a higher claim to the company's assets and dividends than common stockholders.This elevated status is reflected in the name “preferred” stock.

• Dividend Priority: Preferred stockholders receive dividends before common stockholders, and the dividends are often fixed.

• Limited Voting Rights: Preferred stockholders usually do not have voting rights, except in special circumstances.

• Stability: These stocks are more stable and less volatile compared to common stocks, offering steady income rather than significant growth.

• Convertibility: Some preferred stocks are convertible into common stocks under predetermined conditions.

• Hybrid Nature: Preferred stocks share characteristics of both equity and debt, making them appealing for conservative investors seeking fixed income with some exposure to equity.

An investor should prefer to buy “ Preferred stocks” primarily because they have a higher claim on company assets and they are paid out before the common stock investor. Although the price fluctuation is more in the Common stocks, they are riskier also. Dividends are also guaranteed to be paid to preferred stockholders.

Summary of Key Differences: