The terms “stocks” and “shares” are often used in an interchangeable way – a bit like ping pong and table tennis – and yet, they don’t exactly mean the same thing. So, what are stocks and shares? Let's take a look.
What is a share?
A share is when you own a part of a company. There are two main types of shares investors can own, private and public.
Private and public shares
The key difference between the two is that public shares are listed on a stock market where investors can go buy and sell shares without too much hassle. Private shares on the other hand don’t offer investors the same luxury. Since they aren’t traded on a stock market, finding a potential buyer or seller can be difficult, which can cause an issue when things go wrong. Take Woodford’s flagship fund, the LF Woodford Equity Income Fund that invests in private shares, for example. All trading has been suspended and investors are unable to sell their holdings.
Sometimes private companies transform into public companies. When this happens shares of the company change from private to public. A typical transformation involves an initial public offering (IPO) where the private company will list its shares on a stock market, allowing all types of investors to buy and sell its shares with relative ease. For instance, in May 2019, the ride-hailing app, Uber, listed its shares on the New York Stock Exchange. Before the IPO took place, it would be nigh on impossible for your everyday investors to buy shares in the privately-owned Uber. However, now a public company, its shares are publicly traded on a stock market opening up accessibility to any investor with an online trading account.
Benefit of owning shares
Investors who look to hold shares in their investment plans are doing so with one aim: to make a profit. This can be done in two ways, either via capital gains or income.
We talk about capital gains when you’re selling a share that has increased in value. It usually occurs when the company is successfully growing its revenue and earnings, or when there is speculation.
Another way to profit from owning shares is by using them to generate an income. Some companies will pay what is called a dividend to investors who own shares in the company, also known as shareholders.
What is a stock?
As mentioned at the start, the terms “stock” and “share” are often used interchangeably or even combined to form the phrase “stocks and shares”. It can be argued that the term “stock” is a more American term for owning shares of a company. There’s a bigger difference than geography which we will get to later, but, saying “stocks”, “shares” or, “stocks and shares”, will usually not lead to embarrassment amongst the group of people you’re chatting with.
However, if you’re looking for some financial swag when you’re out with your friends, or at the dinner table with your family - you might like to argue that there is a difference between stocks and shares!
So, what’s the difference between stocks and shares?
The key difference between the two terms lies in one subtle observation. The term stocks should be used when discussing ownership of companies in general, whilst the term shares is used to describe ownership of a specific company.
An investor explaining in general terms that they own an investment plan that holds a collection of stocks but does not reference any specific companies would be using the term “stocks” correctly.
If an investor, on the other hand, wanted to discuss the share price performance of Vodafone after its quarterly results were announced as well as the impact on their investment plan, they’d be right to use the term “shares”
Can I hold stocks and shares in my ISA?
Yes, stocks and shares are recognised investments by the UK financial services regulator the FCA (Financial Conduct Authority) and can be held in a Stocks and Shares ISA.
Different ways you can invest in a Stocks and Shares ISA?
If you have plenty of time to spare and a great financial knowledge, you can buy individual shares and build a portfolio of stocks using an online trading platform. Another option is to buy a collection of active funds (hampers full of investments) that aim to outperform the stock market. Let’s not forget passive funds, that are growing rapidly in popularity due to their low fees and simple investment strategies. Passive funds are designed to provide similar returns to that of a stock market like the FTSE 100 and global markets, such as the S&P 500 in the US. Your final option is to outsource the building and managing of your Investment ISA to an investment company that does it all for you, in exchange for a fee - quite a favourable option for investors who have little spare time or investment knowledge! At Wealthify, we build, manage, and monitor your investment portfolio for you.
The tax treatment depends on your individual circumstances and may be subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.