Shares vs Units: How to Choose Between Two Common Investment Structures

Investors often encounter the terms shares and units when building portfolios, but the two represent distinct legal and economic arrangements. Understanding the difference between shares and units affects control, taxation, income, liquidity, and suitability for different financial goals. This guide explains the core differences, compares the practical implications, and offers guidance on choosing the right option for your circumstances.

What Are Shares?

Shares are units of ownership in a company. When you buy shares you become a shareholder with a claim on the companys assets and earnings proportional to your holdings. Publicly traded shares are bought and sold on stock exchanges, while private company shares transfer under negotiated agreements.

Key characteristics of shares

Shares typically provide voting rights, influence over company decisions (depending on share class), and entitlement to dividends when the board declares them. Share prices fluctuate based on company performance, market sentiment, and macroeconomic factors.

What Are Units?

Units are the basic ownership instrument used by collective investment vehicles such as unit trusts, mutual funds, exchange traded funds (ETFs that are structured as unit trusts in some jurisdictions), and certain managed funds. A unit represents a pro rata interest in the assets held by the trust or fund, rather than ownership of the underlying assets directly.

Key characteristics of units

Units usually do not carry voting rights over the assets in the same way company shareholders vote. Instead, unitholders have economic rights to income distributions and capital growth from the pooled assets. Unit price (unit price or net asset value) is calculated by dividing the total value of the funds assets minus liabilities by the number of units issued.

Legal Structure and Control

The legal structure is one of the clearest distinctions. Shares reflect direct ownership in a corporate entity. Shareholders can, depending on share class, vote at general meetings and influence board appointments and major corporate actions. Units denote beneficial ownership in a trust or fund that holds assets on behalf of unitholders, and governance is exercised by the trustee or fund manager rather than individual unitholders.

Taxation Differences

Tax treatment depends on jurisdiction and the specific vehicle, but common patterns exist. Income from shares may come as dividends, which can be franked, qualified, or ordinary depending on local tax rules. Capital gains arise when shares are sold for a profit and are subject to capital gains tax rules.

Units generate distributions that may include interest, dividends, realised capital gains, and return of capital. Tax reporting for units can be more complex because distributions can be broken down into components with different tax consequences. Many managed funds issue annual statements summarising taxable components.

Practical tax considerations

Investors should assess withholding taxes on dividends from foreign shares, the impact of tax-advantaged accounts, and whether a fund structure provides tax efficiency through pooling. Always consult a tax professional for your jurisdiction since small differences in structure can change the tax outcome materially.

Income and Distribution Policies

Shares provide income through dividends, which are paid at the discretion of the company's board. Dividends can be irregular and influenced by corporate strategy, earnings, and cash flow requirements.

Units produce distributions based on the income and realised gains of the underlying pool. Many funds target regular distributions, and some offer distribution reinvestment plans that automatically increase a unitholders holdings.

Liquidity and Price Discovery

Shares of listed companies trade on exchanges, offering transparent price discovery and often high liquidity for large-cap stocks. Small-cap or privately held company shares can be illiquid and harder to value.

Units in open-ended funds or ETFs generally allow investors to buy or sell at the daily fund price or market price during exchange trading hours for ETFs. Closed-end funds issue a fixed number of units and can trade at a premium or discount to net asset value, creating different liquidity and valuation dynamics.

Fees and Costs

Buying shares may involve brokerage commissions, bid-ask spreads, and custody fees. Some brokerages offer commission-free trading for certain shares, which can lower costs for frequent traders or smaller investors.

Units, especially in managed funds, typically carry ongoing management fees, performance fees, entry/exit loads in some markets, and operating expenses. Passive funds and index-tracking ETFs tend to be lower-cost than actively managed unit trusts, but investors must still account for the management expense ratio (MER) when comparing options.

Risk Profile and Diversification

Single-company shares expose investors to company-specific risk. Diversification across many shares reduces idiosyncratic risk but requires capital or use of pooled vehicles.

Units in diversified funds or ETFs provide built-in diversification, reducing single-security risk and simplifying portfolio construction for investors who prefer a broad market exposure without picking individual stocks.

Suitability: When to Choose Shares

Shares are suitable for investors who want direct ownership, voting rights, potential franchise value from long-term compounding, or the flexibility to implement tax strategies such as tax-loss harvesting at the individual security level. Active traders and investors with conviction in specific companies often prefer direct share ownership.

Suitability: When to Choose Units

Units are appropriate for investors seeking immediate diversification, professional management, and simplicity. Beginners, retirement account holders, and investors who prefer a set-and-forget strategy often benefit from funds or ETFs that issue units.

Examples to Illustrate the Difference

Owning 100 shares of Company X means you own a small piece of Company X, you may receive dividends declared by the company, and you can vote at shareholder meetings if your shares carry voting rights. Owning 100 units of Fund Y means you own a proportionate interest in Fund Ys portfolio of assets and receive distributions based on the aggregate performance of those assets rather than the fortunes of a single company.

Key takeaway: Shares equal direct company ownership with voting and company-specific exposure. Units equal pooled ownership with professional management and built-in diversification.

Common Misconceptions

One misconception is that units are always safer than shares. Safety depends on the underlying assets and structure; a poorly managed fund can underperform a well-chosen share portfolio. Another misconception is that shares always mean higher fees; dividend reinvestment plans, low-cost brokerages, and long-term holding can keep the cost of share investing low.

How to Decide: Practical Steps

First, define your investment objective, time horizon, and risk tolerance. Second, evaluate whether you want control and the ability to vote or prefer delegation to professional managers. Third, compare costs, tax implications, and liquidity for the specific shares or unit trusts under consideration. Finally, consider blending both approaches: a core of low-cost units for diversification and targeted shares for high-conviction positions.

When to Seek Professional Advice

If you face complex tax situations, significant capital, estate planning concerns, or are choosing between corporate and trust structures for business or investment reasons, a financial adviser and tax professional can provide tailored guidance. Investment decisions should reflect your overall financial plan, not only the nominal differences between instruments.

Conclusion

Shares and units each have a clear role in modern portfolios. Shares deliver direct ownership, voting rights, and company-level exposure. Units offer pooled exposure, professional management, and simplified diversification. The right choice depends on your priorities: control and selective exposure versus diversification and convenience. Many investors combine both to balance cost, control, and diversification.

If you would like a personalized comparison for your situation, consider consulting a licensed financial adviser who can model tax and return scenarios based on your jurisdiction and financial goals.