Shares vs stocks

When you start your investing journey in Australia, you’ll often hear the words “shares” and “stocks.” While they are often used interchangeably, understanding the simple difference between them is a great first step.

At its core, a share is a popular type of investment that makes you a part-owner of a company. When a company needs to raise money, it can sell these small units of ownership to the public. If you buy a share of a company listed on the ASX (Australian Securities Exchange), you are now a shareholder.

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The Rise of the Stock Market

The idea of issuing shares to raise equity capital for business ventures quickly became popular. Over time, two key refinements were introduced to make this system more accessible.

First, companies began issuing shares with smaller monetary values. Instead of 10 investors each contributing £1 million to raise £10 million, the same capital could be raised by issuing 10 million shares at £1 each. This made it possible for many more people to become investors.

Second, because shares had a value, they could be traded between willing sellers and buyers. This created an opportunity to make a profit just by trading shares without being directly involved in the company. Originally, share trading was done in places like the Royal Exchange and coffee houses where investors would meet. By 1748, the activity was so popular that a dedicated stock exchange was set up in Threadneedle Street, London. This idea soon spread throughout the world, and today, most countries have their own stock exchanges.

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Shares vs. Stocks: The Key Difference

While a share represents a single unit of ownership, stock is the sum total of all the shares issued by a company.

Think of it this way: a single brick is a share, while the entire wall is the stock.

For example, when you buy a share in a company like Woolworths, you own one small piece of that business. The sum total of all the shares ever issued by Woolworths is its total stock. You own a number of shares, but your total investment is referred to as your “stock” in the company.

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The Importance of Shares in Investing

Shares are a fundamental building block of an investment portfolio. By buying shares in different companies, you can:

• Generate Returns: You can make money if the company’s value increases and you sell your shares for a profit (a capital gain), or if the company pays out a portion of its profits to shareholders as dividends.
• Diversify Your Portfolio: Holding shares in different companies across various industries helps spread your risk.
• Participate in Growth: Owning shares allows you to participate directly in a company’s success.

The ASX makes it easy to buy and sell these securities, providing a liquid and transparent market for Australian investors.