The Stocks and Shares ISA is a tax-free investment account available to UK investors. The name implies that stocks and shares are similar but somehow different.
This leads many people to wonder – what is the difference between stocks and shares?
Is there a difference at all?
Definition of ‘shares’
A stock or share is a certificate which entitles its owner to a fraction of the income, assets and control of a company.
Let’s clarify some of those benefits:
Income: The owner of an ordinary share has the right to receive the appropriate fraction of any dividends distributed by the company out of its profits. All shareholders of the same class of share must be treated equally.
Assets: Shareholders may receive a fraction of leftover assets when the company is wound up. Their claim to assets is superseded by all other valid claims such as lenders, suppliers, employees and the tax authority. In practice, are is usually nothing left for shareholders because bankrupt companies usually owe more than they own.
Control: Each ordinary share gives its holder one vote to use at the Annual General Meeting and any other special votes that take place during a year (such as a vote to approve a takeover).
Is there a difference between stocks and shares?
For all practical purposes, there is no difference between stocks and shares. The definition above equally applies to the word ‘stocks’ when used in reference to the equity instrument.
The factor which most explains the different usage is geography – namely whether the speaker is more familiar with British English or US English.
Usage of the word ‘shares’
As we explain in our article what are shares, the purpose of a share is to clearly mark how the ownership of a company is divided between its owners. I.e. what share of the company they own.
Used on its own, ‘share’ will always mean an ordinary share. These are the most common form of share, which grants their owner voting rights and a share of dividends. The rarer form of share known as ‘preference shares’, which carry different rights to income, are always clearly labelled as such.
Usage of the word ‘stocks’
Stock appears in universal words such as stockbroker and stockmarket.
In US English, investors will also use the word ‘stock’ in place of ‘shares’. For example, ‘It has been a tremendous year for US stocks’ and ‘bondholders will receive priority over stockholders’.
In UK English, investors use ‘stocks’ to refer to goods ready for sale, i.e. a component of the working capital of a company. In US English this is called ‘inventory’ to avoid confusion with the equity instrument.
This does lead to an opportunity for unfortunate miscommunications between international teams of professionals!