Buying Shares – Chapter 17: The Difference between Stocks and Shares

This is chapter number 17 out of 19. Read the rest:

Read Buying Shares – Everything that you Wanted to Know but were too Scared to Ask – Chapter 1: Introduction
Read Buying Shares – Chapter 2: What are Stocks and Shares?
Read Buying Shares – Chapter 3: Different Classes of Stocks
Read Buying Shares – Chapter 4: What affects ‘Stock Prices’?
Read Buying Shares – Chapter 5: Stock Markets
Read Buying Shares – Chapter 6: Stock Exchanges, Why are companies listing on a stock exchange today?
Read Buying Shares – Chapter 7: Stock Indexes – What do they stand for?
Read Buying Shares – Chapter 8: How do I Trade Shares?
Read Buying Shares – Chapter 9: What kind of a Trader are you?
Read Buying Shares – Chapter 10: Investing Methodology: Planning Trades and Picking Stocks
Read Buying Shares – Chapter 11: Placing an order – The technicalities involved, Step 1 – Open a Share Dealing
Read Buying Shares – Chapter 12: Step 2 – Research the Stocks
Read Buying Shares – Chapter 13: How to Read Quotes of Shares
Read Buying Shares – Chapter 14: Buying and selling shares- how’s it done?
Read Buying Shares – Chapter 15: Buying Shares – The Rules
Read Buying Shares – Chapter 16: Tips for Stock Market Investing

Usually, these terms are used interchangeably to refer to the pieces of paper that signify rights in a particular company, called stock certificates. They are basically the same thing. But, the difference between the two terms comes from the situation in which they are used.

For example, “stock” is a general expression used to explain the possession certificates of any company, and “shares” are referred to the possession certificates of a particular company. So, if investors say they have possession of stocks, they are usually referring to their on-the-whole ownership in one or more companies.

The small difference between stocks and shares is generally ignored, and it has more to do with language rather than fiscal or legal correctness.

Difference between Stocks and Bonds

Stocks stand for fraction ownership in a company. For example if you possess 100 shares in a company that has 1000 shares, you will have possession of 10% of the company. If the company is growing strongly, then so are your shares. If it is doing badly, then so are you. Companies are pleased to offer fraction ownership in their firms as they know it’s an easy and inexpensive way to raise extra funds.

Bonds, alternatively, are like a credit or loan that you give to a company. So you will never actually own equity in that company but the company will give you interest for using your capital. Let’s say that you bought a bond for $10 with an interest rate of 10% for 5 years. The company owes you the interest of 10% of the amount plus the initial $10 you lent them.

A bondholder always gets his money back with an interest whereas a shareholder may never get back his initial outlay. The shareholder bets on the company’s performance and even in awful times, he will carry on holding the stock until things get better. On the other hand, the bondholder will get his investment and interest paid back whether the company is successful or not.

Bond profits are always fixed, meaning you’ll always get the agreed interest back. In our previous example this means 10% of your investment figure. Profits on the shares however can increase or decrease bringing potentially bigger profit but also a risk of loss of the entire amount you invested.

If a company gets closed down the bondholder will always get his money back before the shareholder- an important point to note when trying to decide between both investment vehicles.

It’s a good idea for your portfolio to contain both stocks and bonds so that if you lose the money on your shares you can still get paid out from your bonds and you’ll have an ongoing source of income.

Read Buying Shares – Chapter 18: Q & A session
Read Buying Shares – Chapter 19: Glossary words to learn