The words shares and stocks are generally used interchangeably in day to day conversation, similarly to how ‘fall’ and ‘autumn’ both denote the season preceding winter. They are both interconnected with one another, sharing numerous similarities, so much so that even the Companies Law of Cyprus (“Cap. 113”) defines a share as being a “share in the share capital of a company, and includes stock except where a distinction between stock and shares is expressed or implied”. So while it is not incorrect to use the two words interchangeably, and in most cases it does not matter which of the two words are used, there are still instances where distinguishing between the two can be of significance. The most vital difference between the two is that a share is a unit of ownership in a given Company, while a stock is a collection of shares. Although there is more to distinguish the one from the other, this is their fundamental difference.
As touched upon above, shares are the smallest unit by which the ownership of a given Company can be ascertained. Depending on the Company in question, the amount of shares held by a single person can be anywhere between 1 and 1 million shares (or higher, as is the case in some Companies). As a result, shares are given distinct numbers and share certificates are given to the holder of the said shares as proof of ownership. The holder of one or more shares is called a ‘shareholder’ and this individual is entitled to certain benefits as a result of the shares he holds. Depending on the nature of the shares held, the individual at hand can have the right to vote at meetings of the Members of a given Company and can even have the right to receive dividends from the Company, among other rights. The rights associated with the possession of shares depends on their ‘class’, with Ordinary being the general go-to class for most Companies.
It is also important to note that shares in a Company can be issued in any of three ways:
- at Par value, meaning that the shares are allotted to the individual at the price that they are worth;
- at a Premium, which as the name suggests, means that the shares are allotted to the individual at a price that is higher than their Par value; and
- at a Discount, meaning that the shares are allotted at a price that is lower than their Par value.
When shares are allotted to an individual, depending on the agreement he has with the Company, as well as if permitted by the said Company’s Articles of Association, the shares can be partly or fully paid up. If partly paid up, it means that the individual has acquired the shares, but has not paid the full amount that he is supposed to, and will be due to pay that amount in the future. In fact, if the Company were to go into liquidation before the shares were fully paid up, this individual will then be required to settle the outstanding amount with the Company.
Also worth noting is that shares are movable property, meaning that they can be transferred with relative ease (depending on the circumstances at hand, of course). However, the interesting aspect is that shares cannot be split into smaller fractions. This means that if a shareholder, holding for example 100 shares, desires to sell his shares to another party, he can sell either all or some of these 100 shares, but only in whole amounts. On the other hand, if he were selling stocks, he could sell fractions instead.
Stocks are, in a nutshell, a collection of shares of either one Company (i.e. a stock) or of a plethora of Companies (i.e. stocks). As per the provisions of section 60 (1) (c) of Cap. 113, a shareholder can convert his shares into stock, but in order to do so, he must ensure that all of the shares are fully paid up, meaning that there no outstanding amounts still payable to the Company. He can then convert the amount of shares into the single fund known as stock and will then, by extension, obtain the label of ‘stockholder’, as opposed to ‘shareholder’. However, before this conversion can be made, certain conditions must be met. First, the Articles of Association of the Company at hand must permit the conversion and specify the process of conducting it. The Company will then have to authorise the conversion by passing an Ordinary Resolution (unless the Articles specify otherwise) by the Members. Finally, the Registrar of Companies (“RoC”) will need to be informed of the conversion within one month of the conversion (section 61 (1) (b) of Cap. 113).
As soon as the Company approves this conversion, it must proceed to update its internal records, primarily the Register of Members, in order to reflect that this specific Member is now a holder of stock(s), as opposed to shares (section 105 (1) of Cap. 113). The Company will also then cancel the Member’s share certificate and issue him a stock certificate, acting as evidence of the stock(s) he now has in his possession (section 78 (1) of Cap. 113). Worth noting is that a Company cannot issue stocks; it must first issue shares which are then converted into stocks. Also, since stocks are comprised of already paid up shares and cannot be themselves issued, the concept of allotment at a Par, Premium or Discount value does not apply to stocks.
Stocks also differ to shares in regards to their distinctive numbers. What this means is that as mentioned above, shares are each given distinct numbers so that they can be distinguished. No such distinctive numbering is applied to stock, however. This is the reason (among others) that stock can be transferred at a fraction. Shares cannot be transferred fractionally, in the sense that you cannot transfer, say, a quarter of a single share to someone else; stock on the other hand permits such a transfer, making it a more flexible choice for investors wishing to transfer a marginal amount of their ownership.
One similarity between shares and stock, besides the fact that they are both moveable property, is that stocks too have types (classes). While a Company may have numerous custom types of stock, the two most regularly used types are ‘Common’ and ‘Preferred’. The former is rather similar to the Ordinary shares of a Company in that it carries a right to dividends as well as the right to vote at Members’ meetings; the latter is similar to Preference shares in that it carries the right to get preferential treatment with regards to dividends, as they are paid to these stockholders first. With regards to which is a better choice, this is a decision that needs to be contemplated by the investor. This is because Common stock is usually most suitable to investors who prioritise the exponential growth of their dividends over time, while Preferred stock is usually most suitable to investors who prioritise income over long term growth.
By now you are probably thinking that stocks and shares are quite similar, and you would not be wrong to think so. However, they are not identical. They differ in multiple ways and are suitable for different circumstances. For this reason, a distinction is important to be made, as this allows an investor to properly decide which is preferable for their specific needs. Worth noting though is that for public Companies, stocks are often a better and more popular choice for investors. This is because public Companies have a high number of shares being allotted, since these shares are open to being purchased by the public. When converted into stock, this almost numberless amount of shares suddenly becomes grouped together, making the Members’ and the Company’s job of keeping track of the amount that each Member owns, much simpler.
This Article and any content forming part of it is only intended to provide a guide on the subject matter and does not constitute legal or any other advice. If professional advice is required, G.C Charalambous & Co LLC would be glad to assist you in this respect.