Practical Guide: Stock Action Categories and Investment Strategies

When you decide to venture into the stock markets, understanding the different categories of equity securities is essential for making informed decisions. Each type of stock offers specific characteristics, benefits, and risks that will determine your profitability and the level of control you have over your investment.

Why is it important to know the types of stocks?

Stocks represent fractions of a company’s share capital. By purchasing one, you automatically become a shareholder and owner of a portion of that company. However, not all stocks are the same. Some grant voting rights in corporate decisions, while others guarantee fixed dividends without that right. The type of stock you hold will determine your rights, obligations, and earning potential.

It is important to know that when the company’s value increases in the market, the price of its stocks rises proportionally. The opposite occurs during periods of economic difficulty. Your final gain or loss will depend on the purchase and sale prices, mainly driven by the law of supply and demand.

Main categories of stocks on the stock exchange

Common or ordinary shares

They are the most traditional and prevalent type in stock markets. Companies issue them to obtain direct financing from investors, avoiding bank debts.

Holders enjoy voting rights at corporate assemblies, with greater weight according to the number of shares they own. They also receive dividends proportional to their participation. These shares have no expiration date; they remain valid as long as the company exists.

The downside is that they are more volatile. Prices fluctuate significantly and may be difficult to sell quickly. The risk is high: if the company goes bankrupt, your investment is completely lost. They are designed for long-term returns.

Preferred shares

They operate similarly to common shares but with crucial differences. Holders do not have voting rights; however, they receive exclusive benefits: guaranteed fixed dividends, regardless of company performance.

When the company distributes profits, preferred dividends are paid first, followed by common dividends. In case of bankruptcy, preferred shareholders have priority in recovering their investment.

They are ideal for those seeking passive income without participating in corporate decisions. Liquidity is higher than common shares: you can sell your position quickly and access cash. The risk is notably lower.

An important consideration: if the company prospers, the biggest beneficiaries will be common shareholders, whose dividends will increase and positions will appreciate. Preferred shares maintain fixed returns.

Privileged shares

They combine features of both previous categories. They offer voting rights and economic benefits of preferred shares, although their issuance requires majority approval at the shareholders’ meeting.

Other relevant classifications

Beyond these three main types, there are additional categories based on different criteria:

Registered vs. bearer: Registered shares are issued in the name of a specific holder, while bearer shares belong to whoever physically holds the document.

Publicly traded vs. private: Publicly traded shares are negotiated on public stock markets. Private shares, typical of small and medium-sized enterprises, are not publicly listed.

Redeemable: These exist only during a defined period, after which they expire and lose validity.

Short: Allow for short selling, expecting prices to fall to profit from declines.

Own: Belong to the company itself and are not sold to third parties. When a company repurchases its own shares, it generally indicates that management believes the price is heavily undervalued, which signals confidence in future increases.

Examples of stocks: Practical analysis

To illustrate how different scenarios work, let’s take the case of a top-tier technology company. During July of last year, this stock started trading at 254.84 USD and closed at 277.64 USD, with a low of 245.70 and a high of 281.60.

An investor who bought 1 lot would have gained 22.80 USD by the end of the month. With 2 lots, profits would double to 45.60 USD. From this gain, commissions and overnight financing costs would be deducted. During this month, no dividends were distributed.

The following month, the same stock opened at 275.36 USD and closed at 260.51 USD, recording a drop of 14.85 USD. Traders who sold short would have capitalized on this decline. Those who held long positions would have experienced losses. Additionally, on August 17, a dividend distribution was made, benefiting buyers and harming short sellers.

Comparative table: Main features

Strategies based on stock type

For common stocks: You will need formal documentation and possibly a contract. If your investment is significant, you will have greater influence in business decisions. Selling requires finding a willing buyer and completing paperwork again. It is a long-term investment.

For preferred stocks: The process is more agile. You can enter and exit the market relatively easily through a broker who facilitates transactions. You have no control over the company but receive a steady cash flow.

For short selling: The broker lends you the stock to sell, benefiting from price declines. When you want to close the position, you buy the same amount and close the operation. It is operationally simpler, but the risk is higher because you bet on downward movements that tend to be quick and abrupt.

For own shares: You can only access if you run a company. They are a positive indicator for other investors as they signal internal confidence in future growth.

Holistic perspective for investing

Stock markets tend to gradually increase over time. Whether you are an active trader or a traditional investor, you should seek profitability through price appreciation.

Conduct thorough analysis of the selected company. If you opt for traditional investment in common stocks, accept that it will not be easy to exit quickly; high demand will be necessary. With short operations, access is quick as long as markets are open, but the risk is substantial.

Remember: short selling generates faster gains when the market drops sharply, which can happen in days or weeks. Investing for upward movement requires patience but offers greater stability. The key is to align your strategy with your risk profile and investment horizon.