In financial markets, a share of stock is an economic interest in the underlying business. The term is most associated with the equities market but also can apply to mutual funds, limited partnerships, and real estate investment trusts.
Stock and share are often used interchangeably yet there are differences. A stock is a piece of ownership in a corporation. A share is the unit of ownership in that entity.
A share is an indivisible unit of capital, expressing the ownership relationship between the company and the shareholder. The denominated value of a share is its face value, and the total of the face value of issued shares represent the capital of a company, which may not reflect the market value of those shares.
An individual who owns shares of stock is called a shareholder.
Stock ownership gives the shareholder a claim on the assets of the corporation along with the profits from the ongoing activities. The first part is why stock is also called equity. It is the stake in the company that one is entitled to.
Companies pay a dividend as a return to the shareholders, the owners of the company. This is often done by mature companies. Growth companies tend to keep their profits and reinvest in the business.
The dividend will be paid in relation to the number of shares held. For example, if a company pays 10 cents a share, and one has 1,000 shares, a $100 dividend is distributed.
Stocks versus Bonds
Stock is ownership in the corporation where a bond is a loan that is made by the investor to the company.
A bond has a fixed rate of return based upon the interest rate being applied. Most bond investors are seeking yield since they are purchasing a fixed income instrument.
Purchases of shares are stock are often motivated by speculation. Even when a dividend is paid, market activity will push the stock price up and down.
Public vs Private Companies
Having share in a company is the same regardless of the type of company. Private companies also issue stock. The different is how the shares are traded.
Shares of public corporations are traded on exchanges. These are digital marketplaces that bring buyers and sellers together. Market participants access it through brokerage firms who are able to access the exchange.
The advantage of an exchange is the liquidity that is available. When a shareholder wants to exit a position, exchanges provide buyers. This is enhanced due to the fact a number of financial institutions operate as a market maker.
Shares in private companies often lack the liquidity meaning they are hard to sell. They are also no available to all investors.
Shares in a public company are available to anyone with a brokerage account in the country of the exchange.
Shares Of A Company
There are a number of terms that are applied to shares.
Shares outstanding are those that are authorized by the government, issued by the company, and held by third parties. The number of shares outstanding times the share price gives the market capitalization of the company, which if the trading price held constant would be sufficient to purchase the company.
Treasury shares are authorized, issued, and held by the company itself.
Issued shares is the sum of shares outstanding and treasury shares.
Shares authorized include both issued (by the board of directors or shareholders) and unissued but authorized by the company's constitutional documents.
The shares can be adjusted by stock splits and buybacks, as authorized by the Board.