Complete Guide on Types of Stocks: How to Choose the Best Investment Strategy

The Financial Instruments That Move the Stock Market

Investing in the stock market requires more than enthusiasm: you need to thoroughly understand what the securities you acquire represent and how they function in the market. The types of stocks vary significantly in rights, risks, and potential returns, and this diversity is precisely what allows you to build a strategy tailored to your objectives.

A stock is a share of a company’s equity. By purchasing one, you automatically become a shareholder and owner of a part of the business. However, not all stocks offer the same rights or benefits. Some securities give you voting power in the company, while others prioritize guaranteeing fixed income. The key is to understand these differences before investing your money.

When a company is listed on the stock exchange, the prices of its shares fluctuate based on multiple factors: financial performance, market sentiment, macroeconomic news, and the basic law of supply and demand. If the company prospers, the value of your securities rises; if it faces difficulties, they can fall dramatically. As an owner, you participate in this price movement, and you also have the right to receive dividends if the company distributes profits.

Main Classification: Three Categories Dominating the Market

The stock exchange offers multiple ways to classify stocks, but three categories account for most transactions:

Common Stocks: Maximum control, maximum risk

These are the classic type issued by companies. They are the most direct way for organizations to obtain financing without resorting to bank loans. Holders of common stocks have voting rights at corporate assemblies, meaning they can participate in decisions about the company’s direction. Naturally, shareholders with larger holdings have greater influence in these decisions.

Additionally, common stockholders receive dividends proportional to their stake when the company distributes profits. This right persists as long as the company exists; there is no expiration date. The contractual and documentary procedures verify this relationship between the investor and their shareholding.

However, these stocks exhibit considerable volatility. Their prices can vary widely and are more difficult to sell if you need quick liquidity. The risk is high: if the company goes bankrupt, your investment becomes worthless, although you have priority in recovering some amount before bondholders without guarantees.

Preferred Stocks: Security over control

These operate similarly to common stocks but with a fundamental trade-off: you waive voting rights in exchange for financial stability. Preferred shareholders receive fixed dividends regardless of the company’s performance. Even if the company faces turbulence, your returns are guaranteed.

In the event of liquidation due to bankruptcy, investors with preferred stocks are reimbursed before those holding common securities. This priority order adds a layer of protection to your investment.

Preferred stocks are ideal for those seeking passive income without wanting to participate in corporate decisions. They have higher liquidity than common stocks, making it easier to sell your position quickly and convert it into cash. However, this security comes at a cost: if the company earns exceptional profits, dividends for preferred stocks remain fixed while those for common stocks increase, leaving you out of the higher gains.

Privileged Stocks: The best of both worlds

This type combines features of common and preferred stocks. Holders have voting rights and also receive fixed economic benefits like preferred stocks. However, their issuance or transfer requires majority approval from the shareholders’ assembly, making them less common.

Other Classifications: Nuances Based on the Type of Issuance

Beyond the three main categories, there are other ways to classify stocks:

Registered and Bearer: Registered stocks are recorded in the name of a specific owner. Bearer stocks, on the other hand, belong to whoever physically possesses the document, without the need for formal registration.

Private versus Listed: Private stocks belong to small and medium-sized enterprises and are not traded publicly. Listed stocks are freely traded on stock markets, offering constant liquidity.

Redeemable: Limited to a specific period. After that time, they automatically expire, and all associated rights disappear.

Short Selling: These operations allow you to speculate on a decline. The broker “lends” you the stock to sell, expecting the price to fall. When closing the position, you buy back the stock at a lower price and profit from the difference.

Proprietary: Belong solely to the issuing company. When a company repurchases its own shares, it is generally a sign that it believes the price is too low—a positive strategy for other investors.

Side-by-Side Comparison

Practical Investment Strategies

Purchase Operations: The Traditional Approach

If you acquire a company’s stock, your profit depends on two factors: the difference between the purchase and sale price, plus any dividends received during the period you held the stock.

Suppose a major technology company was priced at $254 USD in July, reached a high of $281 USD, and closed the month at $277 USD. With one lot of one share, you would have gained $23 USD. With two lots, $46 USD. But you must subtract commissions and possible overnight financing costs. If the company distributes dividends in August, you would receive those payments if you still held the shares at the cut-off date.

Most companies publish dividend calendars so investors know when to expect payments.

Short Operations: Betting on the Decline

Trading allows you to speculate inversely without physically owning the stock. The broker lends you the stock, you sell it at a high price, and when the market falls, you buy it back at a lower price, closing the operation with a profit.

In the previous example, if in August the stock opened at $275 USD and closed at $260 USD, a short seller would have gained $15 USD per lot. Dividends work inversely: they represent losses for the short seller.

Differences in Procedures Based on the Type

For traditional common stocks, you will need formal documentation, contracts, and in some cases, a legal endorsement. If the investment is large, you will gain greater corporate rights. When exiting, you will need to find a buyer and repeat the documentary procedures.

For stocks listed on the exchange through a broker, you practically only send buy or sell orders while markets are open. Liquidity is immediate.

For privileged stocks, approval from the investors’ board is required.

For the company’s own shares, only the owner or executives can access them.

Fundamental Analysis: Before Investing

Whether you choose buy or sell operations, you must thoroughly analyze the company: financial reports, earnings trends, competitive position, sector outlook. In traditional operations, analysis is even more critical because you will have less flexibility to exit quickly if things change.

In the short term, stocks experience considerable volatility. But historically, stock markets tend to rise gradually over long periods, with occasional sharp declines concentrated in a few weeks. This creates opportunities but also significant risks. The best approach is to understand what type of stock fits your risk profile, time horizon, and performance objectives.