Investing comes with its own set of terminology, and sometimes that lingo can overlap. While stocks, stakes, and shares can, in some situations, refer to the same thing, each term has its own distinct meaning.
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When a company wants to raise capital, it can try borrowing money, or it can issue stocks. Stocks are securities that represent ownership in a corporation. When an investor buys a company's stock, that person is not lending the company money, but rather, is buying a percentage of ownership in that company. In exchange for purchasing stocks in a given company, stockholders have a claim on part of its earnings and assets. Some stocks pay quarterly or annual dividends, which are a portion of the issuing company's earnings. Investing in stocks can be profitable in two regards. Not only do you stand to possibly receive dividends, but if the company whose stock you own performs well and its stock price goes up, you could make money by selling that stock for a price that's higher than what you paid. Those who own stocks in a public company may be referred to as stockholders, stakeholders, and shareholders, and in reality, all three terms are correct.
If you own stock in a given company, your stake represents the percentage of its stock that you own. You can, however, have a stake in a company even if you don't own shares of its stock. Bondholders, for example, are considered stakeholders in a company because they stand to benefit if the company performs well. Additionally, if you invest in a smaller, non-public company, you might receive a stake in the business in exchange for your investment. Let's say a company is looking to raise $50,000 in exchange for a 20% stake in its business. Investing $50,000 in that company could entitle you to 20% of that business's profits going forward.
When a company issues stock, each unit of stock is considered a share. One share of stock is therefore equal to one unit of ownership in a given company. Although the term "shares" generally refers to units of stock in a public company, it can also refer to other types of investments. For example, you might own shares of a mutual fund. In a publicly traded company, shareholders are always stakeholders, but stakeholders do not necessarily own shares of stock. Some companies also offer plans or incentives in which employees get a share of their profits. It's common among start-up companies to offer profit-sharing plans to attract talent, though some established companies engage in this practice as well.
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The article The Difference Between Stocks, Stakes, and Shares originally appeared on Fool.com.
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